Hedge funds buy up German TV firm's debt

Apollo and Octavian look to be heading for showdown with KKR and Permira over ProSieben

Hedge funds Apollo and Octavian have been quietly building up a position in ProSieben, one of Europe's biggest commercial broadcasters. The move could lead to a showdown with private equity owners Permira, the Damon Buffini-run giant, and Kohlberg Kravis & Roberts (KKR). Lord Hollick, who was chief executive at former
Daily Express owner United Business Media, represents KKR on the ProSieben board.

It is understood that Apollo and Permira have been buying the struggling German broadcaster's debt on the cheap. Sources suggested that the pair had been paying only around 30cents for every euro of debt, allowing them to become, in effect, major creditors. "Apollo and Octavian have been buying up debt that is trading at distressed levels and I can see them taking on Permira and KKR over the direction of ProSieben," said a source.

The debt amassed between the hedge funds, which are believed to be working in tandem, could be as high as 40 per cent. However, a source close to ProSieben said his intelligence suggested only 10 per cent had been snapped up. Finding out how much debt is traded in the secondary market is notoriously difficult, as buyers and sellers do not have to announce their transactions.

The hedge funds' intentions are not entirely clear, though one media source said that it was thought that they wanted to take control of the company. KKR and Permira bundled their stakes into a holding company called Lavena, which holds an estimated€1.8bn (£1.5bn) of debt and accounts for 88 per cent of ProSieben's ownership.

The value of that stake is reported to have fallen by more than 90 per cent since early 2008, a result of the financial crisis that has particularly hurt the media sector. Falling advertising revenue has been one of the major problems. Houlihan Lokey, a debt adviser, has been called in to restructure KKR and Permira's loans.

A leading media banker said that once Apollo and Octavian had built up a large proportion of the loans, they could attempt to force KKR and Permira to exit through a debt-for-equity swap. However, the private equity groups would have to have either breached their debt terms or be shown to have no real equity interest in the business as a result of the falling value of ProSieben.

"Octavian and Apollo only build up stakes if they're serious," said the source. "They are going to be saying to KKR and Permira that their equity is worthless and that they should not be running ProSieben."

The source added that Octavian and Apollo might look to form a steering committee of creditors in the next month, when they could present their plans. However, a ProSieben source was insistent that such a move was not imminent.

ProSieben, based in Munich, made a loss of €129m in 2008. This result was dragged down by problems associated with a €3.3bn purchase of SBS, a merger designed to help ProSieben take on rival RTL Group.