Murdoch's Kirch collision course

Why the mogul might take on Germany to grab the media giant
Click to follow

A company that owns the TV rights to the World Cup and has a majority stake in Formula 1 will attract the attention of any self-respecting media baron. So it is no surprise that Rupert Murdoch is casting an eye over the Kirch empire, which is floundering in a sea of debt.

Though the canny News Corporation chairman has claimed he is not interested in the German group, put off by the €6bn (£3.7bn) debts, the feeling is that he protests too much.

The empire built up by the septuagenarian Leo Kirch cannot survive without selling large parts of itself. As Kirch's assets include the European TV rights to the next two football World Cups, 58 per cent of the holding company for Formula 1 motor racing and a contract to show live football matches from the German Bundesliga, there are some attractive properties up for grabs.

But Germany's politicians are aghast at the thought of Mr Murdoch's involvement. Kirch owns a German satellite TV service, Premiere, and a stake in Axel Springer, publisher of Die Welt and Bild, the German newspaper equivalents of The Times and The Sun respectively.

Yet Mr Murdoch is in a strong position with Kirch. Through BSkyB he owns a 22 per cent stake in Premiere, and when BSkyB made the investment in 1999 it arranged a "put option". If Premiere does not perform to expectations, Kirch's holding company, Taurus, will have to buy the stake back for some €1.5bn (around £925m) this October. As Mr Kirch is unlikely to be able to find the money, he may have to allow Mr Murdoch to select another means of payment, to wit, the valuable assets within Kirch.

"The option they own is on [Taurus] rather than Premiere," said one analyst, who declined to be named. "This is why it is important for Leo Kirch, because it could bring down the whole Kirch group. I guess Murdoch would like to take control of a large part of the Kirch empire."

But the anti-Murdoch feeling in German politics is as strong as anywhere. Chancellor Gerhard Schröder is believed to be strongly opposed to Mr Murdoch and critical of the way he has fought a newspaper price war in Britain. He wants a German solution to the Murdoch threat, where the Kirch empire would be split up and sold to German owners. Kirch's newspaper interests would be sold to other German publishers and his stake in Formula 1 would be sold to Daimler-Chrysler.

The political backlash may have prompted Mr Murdoch's statement last week that he wanted to cut ties with Kirch because "I do not see how we can continue with the relationship without putting more money into it, and that is something we are not prepared to do." BSkyB, which wrote off nearly £1bn on its involvement in Kirch, also said last week: "Our focus is to get our money back."

This may calm the fears of the politicians, at least for the present. But German newspapers reported last week that Mr Murdoch has hired auditors to value the different parts of the Kirch empire, a strange activity if he is not interested in the assets. If the priority is to get cash, Mr Murdoch will have problems, because there are also other creditors banging on Mr Kirch's door.

Axel Springer says Kirch owes it €767m because it wants to return its 15 per cent holding in ProSiebenSat1, Germany's leading TV company, to the media group. Kirch disagrees and has retaliated with a legal action.

But writs cannot solve all Kirch's problems. It owes €460m to Dresdner bank, which is due in April. The Bavarian state bank, BayernLB, has lent Kirch €1.9bn and part of that is due in June. This exposure is equivalent to around a quarter of the bank's capital.

This brings an added political dimen- sion to the Kirch crisis. The failure of the group would not only damage BayernLB but seriously undermine the hopes of Edmund Stoiber, Minister President of Bavaria, to become the next Chancellor. Mr Stoiber is campaigning above all on his economic record in Bavaria, and problems at BayernLB would damage his reputation.

The options for Kirch are limited. Rolf Breuer, chief executive of Deutsche Bank, a leading backer of the group, said last weekend: "From everything that one reads, the banks are not prepared under the current circumstances to give further funds to Kirch."

German politicians may have to compromise their fear of Mr Murdoch for the financial mess to be sorted out. Talk in Berlin is that Mr Schröder could be willing for Mr Murdoch to take over Premiere so long as the other, more precious assets are left alone. This is seen by many to be a poisoned chalice. Few observers believe digital TV can be easily turned into a success in Germany. There are 30 free-to-air channels and take-up of Premiere has been very slow.

Mr Murdoch has blamed this flop on the expensive set-top technology used by Kirch. He recently insisted that by using the satellite technology familiar to BSkyB, Premiere could be made more attractive and more affordable to German customers.

Indeed, he has a reputation for rescuing lost causes, for example his work at BSkyB and The Sun. But BSkyB shareholders, who were last week cheered by good results from the satellite TV company, are unlikely to want an albatross such as Premiere round its neck. And Mr Murdoch may well wonder why he would want to buy this, when there are profitable newspapers and World Cup rights to be had.

But it may well be that only he is able to turn Premiere into a profitable broadcaster. Few others in Germany could contemplate doing so. That could be his strongest card in the forthcoming poker game with Kirch, the German banks and Germany's politicians.