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Murdoch's Back Door into Europe


It's shaping up to be the Battle of the Septuagenarians. On one side is 75-year-old Bavarian Leo Kirch, who is scrambling to hang on to a heavily indebted empire that includes Germany's largest TV station, a controlling stake in Formula One motor racing, a massive film library, the broadcasting and marketing rights to the 2002 and 2006 World Cups, and German pay-TV service Premiere World. On the other is Rupert Murdoch, chairman and CEO of News Corp. (NWS), who turns 71 on Mar. 11. There's no love lost between the two: Kirch recently described Murdoch as "a shark" in Der Spiegel.

Both are master negotiators, but there's little doubt as to who has the upper hand: Kirch appears resigned to ceding more control to Murdoch, whose British broadcasting business BSkyB (BSY) owns 22% of Kirch's Premiere. When Kirch sold the stake to Murdoch in April, 2000, for $1.4 billion, Murdoch cleverly acquired a put option, exercisable in October, 2002, that would force Kirch to buy him out for the same price. Now, with Premiere floundering, Murdoch says he intends to do just that. "We're not interested in any part of the business at all," Murdoch said through a spokesman. "We'll be exercising our put option in October. We want our money back."

Trouble is, Kirch Group, which owes at least $9.6 billion to various banks and studios, doesn't have the dough to pay Murdoch. Instead, it is considering offering Murdoch a bigger piece of Kirch Media, the company's sports and film-rights division, or possibly even full control of a restructured Premiere, if Murdoch forgoes the option. Industry observers say that if such offers aren't forthcoming, Murdoch will simply wait for Kirch to go under and then seize the best assets from the wreckage.

Sources say Murdoch is personally negotiating with Kirch Group and the German government--a sign of how seriously he takes this opportunity. Yet you wouldn't know from the carefully crafted public statements that he intends to play the scavenger. He has, however, long coveted entry into the Continent. Murdoch was forced to dispose of a loss-making stake in an Italian pay-TV business earlier this year, and France's Canal+ was snatched from under his nose by Vivendi Universal (V) in 1999.

Many analysts believe Murdoch is unlikely to let another chance slip through his fingers. "Murdoch took a complete writedown on Premiere," says one senior executive in the European cable industry. "Now, his balance sheet is clean, and he can sit back and watch Kirch fall apart, hanging on to his option in order to deliver a coup de gr?ce to Kirch later this year."

He may not have to wait that long. Analysts say Premiere will be lucky to survive through September. The pay-TV unit's troubles stem from the hefty fees that it is required to pay for rights to Hollywood films--$2.6 billion over the next four years. Premiere will never break even with programming costs running so high, says WestLB Panmure media analyst Nicola Stewart. It's already behind by more than $300 million and facing two lawsuits from studios seeking payment. "It will only be successful if these contracts are renegotiated," she says.

That's something Murdoch would be more than willing to do. But he also might have to overcome German qualms about letting foreigners into its media market. Germany's cartel office on Feb. 26 blocked attempts by another foreigner, Colorado-based John Malone, to buy a big chunk of Deutsche Telekom's (DT) cable-television system. But in the Kirch affair regulators may have no choice: There are no other investors in sight with the money and knowhow to take over Kirch's assets.

Murdoch may well be positioning himself to step in as Kirch's savior, rather than appear the aggressor. In late February, he met face to face with German Chancellor Gerhard Schr?der. Neither man will reveal the details of their discussion. But there's one compromise that might save Kirch, enrich Murdoch, and fly with the German public: Create a new company, fronted by Leo Kirch or another German, but controlled by Murdoch. Kirch and Murdoch are two old dealmakers. But in the end, there can be only one real winner. By Kerry Capell in London, with Ronald Grover in Los Angeles


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