| BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Why They're Cool to Kirch (int'l edition) Investors fear his units will give each other sweet deals For a while, it looked as though Thomas Haffa was the prince of the Munich media scene. But as shares of Haffa's EM.TV & Merchandising plunged nearly 90% and the high-flying marketer of the Muppets started piling up losses, Leo Kirch stepped in to remind people who is still king. The 74-year-old Bavarian media mogul came to Haffa's rescue--trading his half of a cartoon joint venture for a 17% stake in EM.TV and setting himself up to control lucrative rights to Formula One races. ''The big winner was Kirch,'' says Peter Thilo Hasler, an analyst at HypoVereinsbank in Munich. Funny how often that has been the case. Trained as a mathematician, Kirch has a knack for making the numbers come out in his favor. At the heart of his empire, stored in a vast climate-controlled vault, is Europe's biggest programming library, with 85,000 hours of television and film ranging from Star Trek to Lawrence of Arabia. Time and again, beginning when he bought the rights to Federico Fellini's La Strada in 1956, Kirch has cleverly manipulated that treasure trove--adding to it, borrowing against it--to stay among leaders of the European media world. With the EM.TV deal, Kirch adds considerably to his empire, which with its broadcast units, pay TV, and other properties, rivals giants like Rupert Murdoch's British Sky Broadcasting Group, an ally and sometime foe. Yet there's something about the EM.TV deal that makes investors more than a little uneasy--and illustrates the problems Kirch could face in coming years as he makes initial public offerings of his own holdings. EM.TV shares have plunged more than 50% since the deal was announced on Dec. 4. That was partly due to a nasty earnings surprise, including a 90% cut in the company's profit forecasts. But it was hardly a vote of confidence in Kirch Group. On paper, at least, the purchase of EM.TV looks like a great deal for Kirch. He gets 25% of the voting rights in EM.TV, giving him veto power over major decisions. That could put him in a position to steer the Muppets cast to his own stable of TV stations, such as Germany's ProSieben. In return, Kirch is giving EM.TV its half of Junior, a merchandising venture for children's programming. That's not much of a sacrifice for Kirch: EM.TV was entitled to all of Junior's profits during the startup phase. HIS GRAND PRIX. The biggest prize for Kirch is Formula One. Kirch will pay $550 million for nearly half of EM.TV's 50% stake in the company that owns the broadcast rights to Formula One auto races. That's a one-third discount to what EM.TV paid in cash and stock eight months ago. Kirch can also join EM.TV in exercising an option to buy an additional 25% by the end of February. After 2003, when Formula One's contract with broadcaster RTL Group expires, Kirch will probably try to use his clout to push the races on to his channels. So why the jittery response from investors? The answer lies partly in Kirch's vast programming vault in a Munich suburb, where metal film canisters are stacked neatly to the rafters. Many of Kirch's programming deals are with his own broadcasters, such as Sat.1, or proteges such as Haffa, who spent nearly 10 years working for Kirch before striking out on his own in 1989. Analysts are worried that Kirch will use his mastery of the rights business in ways that aren't necessarily in the interests of EM.TV shareholders. For example, what's to stop Kirch from cutting himself a good deal on Formula One, one of Europe's top sports attractions? Kirch Group insists it always sells to the highest bidder. But what unsettles investors is Kirch's power over pricing of programming. Analysts say there's nothing to stop Kirch from adjusting the price of a Baywatch episode, say, to help the balance sheet of one privately held subsidiary at the expense of another unit. ''There's always the thought in the back of your mind that it's all one big company,'' says media analyst Istir Ozkaya of B. Metzler seel. Sohn & Co. Lack of transparency is one reason she recently cut her rating for shares in ProSiebenSAT.1 Media, a Munich broadcaster controlled by Kirch, to ''hold'' from ''buy.'' The Kirch Group won't reveal its total sales and profit: Based on publicly available information, the group had sales of about $4 billion last year. Insiders say it's profitable. In fact, a sweet programming deal with Kirch helped put EM.TV on the map in the first place. Two years ago, Kirch sold EM.TV a 50% stake in Junior for $220 million. That seemed a good price for a stable of venerable cartoon characters, and boosted Haffa's reputation as a sharp negotiator. The explanation at the time was that Kirch needed cash for his ramp-up in digital TV. But now, analysts wonder what was really going on. Was Kirch actually doing Haffa a favor? Or was he unloading a bunch of old programming with declining appeal? Investors don't like the feeling that there's more than meets the eye. Kirch has contributed to the mystery. He avoids publicity, earning a reputation as a recluse. That's not entirely fair: He socializes enough to have a web of contacts in business and politics, including ex-Chancellor Helmut Kohl. Another aspect of the Kirch mystique is his fatherly relationship with trusted aides and associates, including Haffa. TRUST ISSUE. Soon, Kirch is going to have to show investors the same kind of loyalty. Outwardly fit, Kirch doesn't enjoy perfect health. Sources close to Kirch say he had a heart bypass operation earlier this year. And diabetes has damaged his eyesight so much that he can't read. He has already begun planning his succession. Dieter Hahn, 39-year-old deputy CEO of Kirch Group, is the heir apparent. If all goes according to plan, Kirch will list the key components of his businesses on the Frankfurt stock exchange, probably beginning in 2002. But investors will want assurances that Kirch won't milk publicly held subsidiaries to feed his privately held units. Outside investors are also uneasy about Kirch's ambitious forays into pay TV. By Kirch's own estimates pay TV will have cost $3 billion by 2003, when it's supposed to break even. But the losses could continue to pile up, especially if the Internet gives consumers the option of downloading programming from the Net--bypassing pay TV networks such as Kirch's. If stumbles in pay TV eventually make Kirch vulnerable, one endgame scenario would involve BSkyB, controlled by Rupert Murdoch's News Corp. BSkyB holds 22% of KirchPayTV. If pay TV doesn't become profitable on schedule, BSkyB could demand a bigger role in Kirch Group as compensation for its backing--and thus win a long-coveted foothold in Germany. That's probably a few years away--and besides, Kirch has just pulled off another coup. But the uneasiness over this media king's final act is building. By Jack Ewing in Frankfurt _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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