[A-List] Germany: Kirch crisis

["Keaney Michael" <Michael.Keaney@xxxxxx>]

There has been build up in recent weeks concerning the impending
bankruptcy of conservative media mogul Keo Kirch's German business
empire. Closely linked to Helmut Kohl and now presidential candidate
Edmund Stoiber, Kirch's unravelling promises to reveal much about the
way things have been in done in certain circles in Germany up until now.
Of course the FT has been cheerleading the moves towards "Anglo-Saxon"
capitalism in Germany for months now. Just about every week there is one
half page article showing readers how Germany is now moving to the
Anglo-Saxon model, rather like the other article that's dusted down on a
weekly basis, explaining why jobs for life are no longer the case in
Japan. Nevertheless, Kirch's dealings also involve Rupert Murdoch, whose
interests have taken a large hit thanks to Kirch's backing the wrong
horses. This is worth keeping an eye on.


Bavarian breakdown
The crisis at Kirch is emerging as a test of German capitalism that
threatens to engulf the region's banking and political establishment,
write James Harding and Bertrand Benoit
Financial Times, February 20 2002

Bavarians and Texans may not like the comparison but Munich and Houston
are looking increasingly like twin towns. Both have been host to a
corporate giant undone by fancy but imprudent financing deals and murky
accounts. Both have boasted a chairman closely tied to the local
conservative political establishment. Both have thrown up their
conservative political leader to run for national office.
To visit our special report, Kirch's debt squeeze, click here

In Texas it was Enron. In Bavaria it is Kirch, the debt-laden,
cash-hungry media giant, which daily seems to be getting into worse
trouble. And just as the collapse of the energy trader has raised
questions about Wall Street-style capitalism, the Kirch crisis is a test
of Germany Inc.

Kirch Gruppe is a privately owned company, funded by local state-owned
banks. It was built by Leo Kirch (pictured), a reclusive Bavarian, who
has been a friend and backer of Germany's rightwing politicians. That
means Kirch's problems could touch off concerns about how German
politics meshes with business.

Mr Kirch, now 75, was a friend of and secret donor to Helmut Kohl, the
conservative chancellor who dominated 1980s German politics. Edmund
Stoiber, the Bavarian premier, who is also close to Mr Kirch, is now the
conservative candidate standing against Chancellor Gerhard Schroder in
the general elections due in September.

Mr Stoiber's association with Kirch could yet colour his candidacy. He
has championed Munich's transformation into a media and technology hub
in Germany. But his credibility could be undermined by the collapse of
Kirch, particularly if it leads to Bayerische Landesbank, the regional
state-owned bank, having to write off its E1.9bn exposure to the group.

Mr Schroder, who has been kept informed by banks of the troubles at
Kirch, knows it. But the chancellor himself is far from worry-free. The
failure of a German corporate giant would add to Germany's 4m
unemployed. A foundering Mr Kirch could also turn to Rupert Murdoch to
buy into his media empire, leaving the Australian-born media mogul
owning some of the most important German media assets.

Mr Kirch has courted disaster before and got away with it. Kirch Gruppe
today is the biggest media company in Europe's largest media market.
Based in Munich, it owns the leading TV stations, Germany's largest
pay-TV platform, the broadcasting rights to World Cup football and
Formula One motor racing, as well as a 40 per cent stake in the
publisher of Germany's most popular newspapers.

>From the start 47 years ago, Mr Kirch has borrowed to build his
business. Mr Kirch's traditional core business has been trading film
rights - his first acquisition was the Fellini film La Strada. When his
debt-laden company has run short of money, he has shuffled assets and
turned to sympathetic banks and friendly billionaires, such as Otto
Beishein, the German supermarket mogul, for assistance.

Mr Kirch is now contemplating a break-up of his empire to fund his
survival. The stake in Axel Springer, the German publisher, and
Telecinco, the Spanish broadcaster, are being sold off. The television
rights to Formula One, which until yesterday were not being considered
for sale, are on the block.

With so much riding on keeping Kirch from bankruptcy, there has been an
assumption among media executives, bankers and politicians that a
solution - probably a "German solution" - would be found to keep Kirch
afloat. Kirch's lending banks, a line-up of Germany's biggest banks,
including Deutsche Bank, agreed last week to keep their credit lines
open.

But the numbers are stacked against Kirch. The value of the assets is
unclear, as the privately owned company offers only glimpses of its
patchily audited figures. But the liabilities look greater than the
assets. According to Kirch, the company owes the banks about E6.4bn and
will have to pay at least a further E2.3bn to honour deals with other
investors. According to others who have seen the German company's
balance sheet, the list of liabilities is longer: estimates of Kirch
debt and liabilities range from E13bn to E18bn.

The company is also in serious need of cash. Kirch will have to pay
E1.7bn by October to Mr Murdoch - money it says it does not have. The
deals Kirch has done over the past three years to attract investors are
coming back to haunt the company. In each case, Kirch needed money to
fund busi-nesses. Several investors bought into the company with a put
option as a form of insurance. If the business did not prosper, the
investor could demand the cash back plus interest. Investors such as Mr
Murdoch and Axel Springer, the German publishing group, are asking for
the cash.

Meanwhile, Kirch's pay television business, which loses E80m a month,
has run out of money and will need a further injection of E2bn in cash
in order to break even. Kirch cannot afford to close down the lossmaking
pay television platform, because it plays a crucial role in sustaining
KirchMedia, the media rights arm. It is the main customer for the films
and television programmes from the company's library.

In recent days, Kirch has started to cast a shadow over Germany's
financial system. The banks, particularly in Kirch's home state of
Bavaria, are heavily exposed to an opaque company that many did not
really understand. Kirch Gruppe operates a web of well over 150
subsidiary companies. Some of them are audited by KPMG, one of the Big
Five accountancy firms. Some of them are audited by Bavarian
accountants. Some are not audited at all.

As the credit committees inside German banks this week scramble to
assess their exposure to Kirch, some have discovered that their loans
are not as secure as they thought. Assets have been moved from one Kirch
company to another. In one case, an asset has been double-booked as
collateral. In another, an asset that should be serving as security on a
loan appears to have been sold off to raise cash.

This shifting of assets even leads some German executives to draw a
comparison between Mr Kirch and Robert Maxwell, the man whose British
media empire collapsed in a scandal of stolen pension funds. But the
comparison is limited. Mr Kirch, like Mr Maxwell, has stamped his
character on his media business. But Kirch has no pension fund - and
there is no suggestion that Mr Kirch has misappropriated any of the
company's assets.

Many banks have also accepted film rights as collateral for their loans.
And many of these rights could be overvalued in Kirch's balance sheet,
according to people who have worked on the company's film library. The
sale of films from KirchMedia to the pay television company has been
booked at prices that rival operators consider inflated prices. "If
there is a comparison with Enron, it is in the overvaluation of the
rights," says a former Kirch executive. "There is plenty of stuff there
that nobody would ever think of buying."

Bayerische Landesbank, the Bavarian state-owned bank that has nine local
cabinet ministers on its supervisory board, has E1.9bn in outstanding
loans to Kirch, most of which are un-secured. The bank's board is
chaired by Kurt Falthauser, the Bavarian finance minister, who must
approve all loans above E25m. A collapse of Kirch would both damage Mr
Stoiber's image and dent the regional government's finances.

The fall-out would not stop there. Executives in German banks and
broadcasting groups have already begun to ask questions internally about
their companies' dealings with Mr Kirch. And Christian Democrat
politicians - notably Mr Kohl - have long received financial support
from him. As the counter-parties to Mr Kirch's business empire have
watched Enron's collapse engulf auditors, bankers and parts of the
political establishment, they know the Bavarian media mogul is not the
only one with much to lose if Kirch fails.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT3QDZ65WXC
&live=true

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx