[A-List] Germany: Kirch crisis

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

Reluctant Leo Kirch forced into the spotlight
By James Harding in London
Financial Times: April 9 2002

When Leo Kirch enters a room, he likes to sit with his back to the
window. Mr Kirch, 75, suffers from diabetes, which affects his sight. He
blinks, uncomfortably, in the light, shielding his rheumy eyes until he
can find a seat obscured from the sun.

The founder of Germany's most influential media group, Mr Kirch has long
preferred the shadows.

Mr Kirch provided secret financial support to Helmut Kohl after the
former conservative chancellor's party became embroiled in a slush fund
scandal in 1999. Through the 1980s and 1990s, Mr Kirch exerted political
influence at one remove: Mr Kohl tended to get prominent and largely
supportive coverage on Mr Kirch's television stations around election
time.

Behind the scenes, Mr Kirch has applied pressure in business too. He has
sought to squeeze out competition in the German film market, buying up
Hollywood rights and suffocating rival movie rights traders.

And all the while, Mr Kirch has kept out of the limelight. He has spoken
to the press perhaps half a dozen times in the past dozen years. He has
shunned the red carpets at movie premieres and the fancy investor
conferences. He has preferred to stay in the suburbs of Munich,
shuffling in his orthopoedic slippers.

But the collapse of Kirch promises to expose Mr Kirch to an altogether
new kind of scrutiny. As its new management took over the administration
of the bankrupt business, they announced the first hidden liability - a
E90m ($79m) put option made in the margins of another Kirch deal.

More are likely to follow. With insolvency experts, judges, politicians,
creditors and angry employees trying to piece together what brought the
company down, the secretive practices of a man who was once Germany's
most powerful media mogul look set to come to light.

"People are going to start asking questions about shell companies," said
one banker, referring to the more than 200 corporate entities and
separate business vehicles which are part of the Kirch web. "If they
start trawling, they may start flying to Switzerland and start finding
some nasties."

Media executives have begun to warn about undisclosed liabilities. Kirch
bought not only the broadcasting rights to World Cup football and
Formula One motor-racing, but dozens of other sporting contests.

Credit officers at some of the world's biggest banks have long been wary
of Kirch. They believe Kirch double-pledged assets to secure loans.

For example, Kirch's film library, the biggest outside the US, was used
as collateral. As Mr Kirch ran short of cash in the 1990s, he is
understood to have turned to several smaller banks in Germany and
Austria for top-up funding. The big creditors have recently begun to
worry out loud that the smaller, later lenders were also promised chunks
of the same film rights library as security against their loans.

By his own admission, Mr Kirch has historically liked to keep his
counter-parties in the dark. Dieter Hahn, his deputy, explained to the
FT last year that the challenge for the company was transforming an
historically secretive culture.

"When you are buying in Hollywood and selling in Germany, you do not
want to tell the one side how much you are paying or the other side how
much you are getting," he explained.

The son of a local vintner, Mr Kirch made his first steps to becoming a
towering media figure in post-war Germany with the purchase of the
rights to Fellini's La Strada in 1956. He borrowed DM25,000 from his
wife to pay for it.

Over the years, he borrowed ever more to build a giant library: a
package of 100 films from United Artists/Warner Bros in 1959, the Howard
Hughes/RKO library which included Citizen Cane and King Kong in 1969,
the Hal Roach library which boasted the Laurel and Hardy movies in 1971
and long-term, comprehensive deals with all the big Hollywood studios
which started in 1996.

Mr Kirch also amassed nearly E10bn in debts and other liabilities in the
process. And those are just the published figures. It emerged on Monday
that KirchMedia owes $500m to the Hollywood studios, much more than
expected. One senior executive at another German media group closely
aligned to Kirch suggested the Bavarian group's liabilities may prove to
be billions of euros more than the official figures.

Through the 1990s, Mr Kirch ran short of cash and into trouble with his
creditors. Each time, he secured a solution.

German banks extended credit. Wealthy private investors, such as Otto
Beisheim, the cash-and-carry billionaire and a personal friend, provided
funds. Other media moguls, such as Silvio Berlusconi, now the Italian
prime minister, and Rupert Murdoch, the News Corporation chairman, were
persuaded to take minority stakes.

At the time, these looked like strategic investments. As Kirch has
limped towards bankruptcy over the past six months, it has become
increasingly clear that these minority investments were brought in to
keep Kirch's businesses from the insolvency courts.

The old business of buying and selling movie rights did not bring Kirch
down. Instead, it was old-fashioned imperial over-reach involving
new-fangled technologies and financial instruments.

The attempt to build Premiere, his pay-TV platform in Germany, racked up
losses of E3.2bn. Kirch got in the habit of over-paying for sports and
movie rights to guarantee exclusive content to German audiences, who
proved stubbornly reluctant to sign up for multi-channel TV.

As Kirch needed ever more funds to finance not only the Premiere losses,
but also the increasingly crazy economics inside KirchMedia, he agreed
to offer put options to investors.

These effectively guaranteed cash back plus interest on investments -
even if they were not cash investments in the first place. As media
markets crashed in 2001, Kirch was left standing in the path of what one
senior executive called "an oncoming truck".

In fact, it was several oncoming trucks. Mr Murdoch controlled a E1.7bn
put option, which Kirch would have to honour in cash come October 2002.
Before that, Axel Springer, the German publishing group, had a E767m
option it triggered in January. Minority investors in KirchMedia, which
included Mr Murdoch, Mr Berlusconi, Saudi investor prince Alwaleed and
US investment bank Lehman Brothers, were in a position to demand a
separate E1bn in July.

Kirch's businesses, meanwhile, did not have the money to pay day-to-day
bills. The imminent demands for cash were becoming a very public
"liquidity event".

In December the FT revealed that Mr Murdoch had been talking to senior
executives about the possibility of working out a deal with Kirch's
banks to take control of the German media empire. A month later, Rolf
Breuer, the Deutsche Bank chairman, questioned Kirch's creditworthiness.

>From then on, it was clear that Mr Kirch's days as a media mogul were
numbered. For a while, some of his former friends now turned disgruntled
creditors sought to engineer a rescue.

But, at each turn, they were shocked to find another liability or
another cross-shareholding shackling down the business.

Wolfgang Hartmann, a Commerzbank executive who on Monday spoke for the
creditor banks in Munich, blamed the "increasing opacity and
indebtedness" at KirchMedia for its collapse. Internal controls were
also a problem, he suggested: "Let us say, if KirchMedia had been as
good at reaching its operational milestones as growing sales, it would
be very profitable indeed."

To make matters worse, the large number of interested parties - the
Bavarian banks, the financial investors, the media operators and the
Kirch management - squabbled among themselves.

As KirchMedia filed for insolvency, Mr Kirch stood down. He sent his
staff a note to say thank you and goodbye. "It was not just about
creating a powerful company, rather a vertically integrated media
enterprise for the eyes and the ears," he wrote. "That was my vision."
And he signed off "God bless", bidding farewell to a vision he still
hopes, but cannot expect, to see.

Full article at:
http://news.ft.com/ft/gx.cgi/ftc?pagename=View&c=Article&cid=FT30WW8PSZC&live=true&useoverridetemplate=ZZZ3XDHE90C&tagid=ZZZA31PK20C

Michael Keaney
Mercuria Business School
Martinlaaksontie 36
01620 Vantaa
Finland

michael.keaney@xxxxxx