A winning formula

What do Kermit the Frog and motor racing have in common? They are helping Germany's Haffa brothers become Europe's answer to Disney

Until recently, Kermit the Frog and Formula One racing didn't have a lot in common. But in the past few months they have been brought together by a new owner, the relatively unknown German company EM.TV & Merchandising, run by the Haffa brothers. Together, the famous frog and the world's fastest racing cars are the heavy artillery for EM.TV's aspiration to be Europe's Walt Disney Co.

This sounds ambitious and it is, on the face of it. What do the Muppets and race cars have in common? Not much, right? Wrong, says EM.TV's founder and CEO Thomas Haffa. "I'm talking about branding," he says. "The winner tomorrow will be the one with the most content, the best content and the best brands. Formula One is one of the best brands in the entertainment industry, if not the best."

In numbers, he has a point. Last year, Formula One events had an aggregate TV audience of 57 billion across 206 countries.

Branding is something Thomas Haffa, with his background in merchandising, has taken seriously for years, long before the internet put a spotlight on the importance of recognisable names. But even he draws the line at Kermit replacing racing superstar Michael Schumacher in the driver's seat. Although he is a Formula One fan, he chuckles when asked if buying into Formula One didn't just realise a boyhood dream to own really fast cars?"That would be a pretty expensive hobby," he says.

This March EM.TV paid $712m and 10 million EM.TV shares to buy 50 per cent of the company which owns all Formula One marketing and TV rights for the next decade. The seller was Bernie Ecclestone, the man who turned Formula One into an extremely lucrative franchise. "What Bernie Ecclestone has built is unique in the world," says Thomas Haffa.

Buying into that franchise was not cheap, but since listing on Germany's high tech stock exchange - the Neuer Markt - in October 1997, EM.TV can afford to play in the big leagues. "EM.TV is one of the pearls of the Neuer Markt," says Stephan Seip, a media analyst at Merrill Lynch in Germany. "There's a first-mover advantage because they were one of the first media stocks in the exchange, but they also always delivered the facts for their fantasy."

The company's stock price has soared - wait for it - 25,000 per cent since the initial public offering. At one point last year, EM.TV was trading at an eye-popping 1,600 euros (£936) a share, prompting a 25-to-one stock split. And even with the recent tech stock slide, EM.TV is still trading at 90 euros, up from 60 euros at the beginning of the year, giving a market capitalisation of 11.8bn euros (£6.9bn).

This stock market success has allowed Thomas Haffa, 48, and his brother Florian, 35, who joined the business weeks after Thomas set it up in 1989, to build a TV programming, distribution and merchandising company with its sights set beyond Germany and even beyond Europe.

A month before the Formula One acquisition, the company's strong share price helped finance the $680m cash and shares purchase of the Jim Henson Co, which owns Kermit, Miss Piggy and the whole gang of Muppets. The deal has nearly doubled staff levels to 600, and gives EM.TV a calling card for the lucrative US market for the first time. Henson already distributes its shows in Asia and part-owns, with Hallmark Entertainment, The Kermit Channel, which expands EM.TV's reach in that region as well.

EM.TV has carved out a lucrative niche first in Germany and, increasingly, is looking beyond its own country into Europe and the rest of the world. Fierce determination and a canny sense for what works with audiences, particularly children, has helped propel the company into a position among the top players in European media, as an acquirer of well-known TV programming as well as an original producer of programming.

This year's group sales are expected to exceed DM1.6bn (£480m). British viewers can watch two of their offerings - Tabaluga, an animated dragon, and Blinky Bill - on Cartoon Network, and the company is looking for a bigger presence here too.

Even with the Formula One deal under its belt, more international acquisitions are likely. There is speculation that the Haffas could be interested in Teletubbies, the pre-school show made by Ragdoll Productions in the UK and aired on the BBC. Some analysts believe the Haffas are looking closely at the Japanese market, known for producing highly-marketable TV shows such as Pokémon.

And there is the internet. EM.TV has big plans. The company says it will launch its own internet service provider - Junior Web - in November, first in Germany and then roll it out in other countries where EM.TV already has its Junior TV brand. "The internet companies are coming, but most of them have software and good ideas but no content and no brands," says Thomas Haffa. "We have content and brands. The key to the future will be access to the consumer. The direct access is the key and this is what we are working on."

Thomas Haffa's knack for recognising potential hits comes with a long memory. He first came into contact with Jim Henson's Muppet magic in the late Seventies when he was working at IBM, years before he set up EM.TV. Henson and a Muppet were part of a sales training video used by the computer firm. So when EM.TV held the press conference announcing the purchase of the Henson Co earlier this year, having Miss Piggy, with Kermit at her side, was a validation of his early attraction to the power of Muppets.

Probably the funniest part of the affair was when Miss Piggy was told by Kermit that the Haffa brothers were their new owners. Miss Piggy asked if Florian was in the room and when told by Kermit that he was, swooned: "Oh, my. But I looove Florian!" This was followed by numerous amorous phrases in German, scattered with blown kisses. The funny part is that Thomas is the brother who has had his eyes on Miss Piggy for all these years, not Florian. During the act, Florian looked a bit sheepish, but Thomas took it all in stride. At one point he was laughing so hard he stumbled over his prepared statement.

If acquiring the Henson characters wowed the clubby TV world, the acquisition of 50 per cent of SLEC Holding Ltd, the company which owns Formula One marketing and TV rights up to 2010, put EM.TV under an international spotlight. Critics say EM.TV overpaid by 30 per cent and the European Commission's inquiry into allegations that Formula One is a marketing monopoly puts a question mark over future earnings and the feasibility of an IPO. But even the more cautious stock analysts were rushing to re-vamp their models to account for income from Formula One.

"EM.TV's expertise in merchandising and marketing brand names, as well as events such as the FIS World Snowboard Championship, can unleash Formula One's still dormant potential," says Christoph Benner an analyst at Deutsche Bank. "Thomas Haffa can really sell, and he's got a feeling of how to brand." A German freelance journalist, Dieter Brockmeyer, adds: "Formula One was not something that you would have thought was necessary, but they don't have Mickey Mouse so they needed something else."

How EM.TV plans to "unleash" Formula One's earnings potential provides insight into how the company thinks, and how the Haffa brothers work together. Thomas provides the strategic vision comments. Then, with a wave of his hand - characteristically holding his horn-rimmed reading glasses - and a nod of his head, he figuratively passes the microphone to his younger sibling.

Florian is the numbers man. So Thomas talks about the power of the Formula One brand, and Florian adds: "Formula One is the most solid company I've seen in a long time. It has a 50 per cent EBITDA (earnings before interest, taxes, depreciation and amortisation) margins and a 48 per cent EBIT margin.

"Only 2 per cent of the total sales are generated in North America and we have a race this year in Indianapolis so look at that. And as for the internet business there is none exploited at all. So just with those two considerations it's a great deal."

At the recent Mip TV international programming market in Cannes, where TV channels and programmers from around the world gather to buy and sell, it was like watching a tag team. While the more approachable Florian greeted the press, Thomas was in a back room having a serious discussion with a potential client.

"We spread the energies," said Thomas later that day. "While one is here the other is there." But the division of labour goes even deeper. "Basically it's Thomas's ideas," says Florian. "Then it's a team effort. I spend my time with the lawyers in different cities and Thomas comes in to give it a final kick." Thomas says: "Florian does the numbers. I say, 'We do it' and he says if we can do it financially."

Thomas Haffa has a knack of picking products which will cross cultural boundaries. In the early days of EM.TV he took the bold step of acquiring the German TV and merchandising rights for the then relatively unknown Teenage Mutant Ninja Turtles show. He bought the BBC version of the show, which had re-named them The Hero Turtles and edited out many of the violent fight scenes. The show became one of the top cartoons on RTL, Germany's largest commercial TV broadcaster, and a big merchandising success. Today EM.TV holds the German TV and merchandising rights for Pokémon.

This philosophy of owning the whole value chain, from production to distribution, is influencing many media companies. When Pearson merged its TV programming and distribution arm with European broadcaster CLT-UFA last month, the Pearson CEO Marjorie Scardino said that now Pearson could take more risks in its programme-making because it had a guaranteed broadcast outlet. AOL's purchase of Time Warner has a similar theme - control both the content and the distribution.

"I think there will be a change in the whole industry," says Thomas Haffa. "Typically, the industry is divided into production companies, distribution companies and merchandising companies. This is the way it has been. But we do everything together. I believe it is necessary to create links between media on one side and industry and retail on the other."

EM.TV, originally named Entertainment Munich and based in Uterföhring, a suburb of the Bavarian capital, began in 1989 after Thomas Haffa left his job at one of Germany's largest media companies the Kirch Group.

He had worked at Kirch since the early Eighties, setting up and running the video tape business and the merchandising division. His third job inside the group was running the music division where he was responsible, among other things,for the merchandising of the extra-terrestrial TV character Alf.

"I noticed very early on that music producers, retailers and merchandisers have to co-operate closely in order to achieve lasting success in the market," he says.

He left Kirch and, using his leaving presents of a car and a mobile phone as his start-up capital, began looking for a deal to start his own company. He found it in Alfred J Kwak, an animated duck who some say looks a lot like a certain duck owned by Walt Disney.

Armed with the licence for the animated series from the duck's creator Hermann van Veen, Thomas Haffa set out to build the duck brand. When the German mail-order company Quelle did a 10-page spread in its catalogue that featured Alfred J Kwak apparel for children, EM.TV was on its way.

Florian had been at university in Munich, but soon after Thomas set up, Florian was on the phone asking to come and join. "I started it and three or four weeks later he was there," says Thomas.

By 1991, EM.TV counted 20 staff and had signed its first co-production deal for the Australian cartoon character Blinky Bill, closely followed by a similar deal for Tabaluga the dragon. The company also moved into events merchandising and, more recently, into publishing.

The Haffa's philosophy is simple: find a popular character, such as Tabaluga, and keep on finding ways in which it can be exploited. Last month - more than 10 years after the original Tabaluga deal - EM.TV signed a DM45.5m contract with German public broadcaster ZDF that includes an agreement to co-produce 78 new Tabaluga episodes. Separately, EM.TV wants to produce a movie.

One deal in particular has given EM.TV the platform for global ambitions. In late 1998 the Kirch Group needed cash, mostly because its pay-TV business was costing more than anticipated. Thomas Haffa's knowledge of the Kirch programme library and his relationship with its owner Leo Kirch, combined with Florian's financial skills and plain good timing, gave EM.TV a gem of an opportunity.

EM.TV paid just DM500m for 50 per cent of a new joint venture with the Kirch Group called Junior TV. Under the deal, EM.TV won the right to exploit the Junior brand, access to 20,000 half-hours of children's and family programmes from the Kirch library and exclusive distribution rights in both free- and pay-TV and all ancillary media.

Thomas Haffa says: "This is a once-in-a-lifetime deal. No one has assembled this amount of children and family programming under one house before." The Kirch library is by anyone's accounting a goldmine, including the rights for animated superstars from Pippi Longstocking and Maya the Bee, to German-only rights for Tom & Jerry, Bugs Bunny and The Flintstones.

Annelie Hoppe, who is a media analyst for WestLB Panmure, says: "Overnight it catapulted EM.TV into a completely new position as a leading supplier of programming in Europe. After the deal it had more than 24,000 episodes of programmes, more, in fact, than Warner Brothers or Walt Disney."

On the downside, some analysts note that the bulk of Junior's library has rights only for Europe's German-speaking markets.

EM.TV has been busy for 18 months building the Junior channel, which acts like an umbrella brand over EM.TV shows it sells to broadcasters. Unlike the children's channel Nickelodeon, Junior is not usually a stand-alone channel. Instead it rents time on other channels and airs Junior as an extended block of programming.

The distinctive yellow Junior logo is already in Germany, Switzerland and Ireland, and the company is also talking to UK broadcasters. Last month EM.TV announced a joint venture with the Spanish media company Grupo Planeta to establish the Junior brand in Spain and Portugal. The two companies will launch a Junior TV block , as well as co-produce programming on two Spanish television channels where Grupo Planeta is a shareholder. The deal also includes merchandising and publishing ventures.

With Mexican programme distributor Comarex, EM.TV also plans to launch a Junior pay TV channel by 2001 to reach up to 26 countries in South and Central America.

In September 1999, EM.TV paid DM800m for a 45 per cent stake in TeleMunchen Group, the second biggest German library after the Kirch Group. TeleMunchen's archive includes 2,700 feature films and the German broadcast rights to the Champions League covering the next four years, as well as equity stakes in German channels RTL2 and TM3.

This purchase, as well as other acquisitions, have pushed EM.TV's programme library to 30,000 half-hour episodes and signalled without doubt that EM.TV has ambitions outside children's and family programming. An IPO for TeleMunchen is planned in the next 12 months.

But even as the Haffa brothers look for their next deal, they will have to focus on integrating and managing their new assets. Particular care will have to be taken with the Jim Henson Co because Henson staff consider Kermit and the other Muppets to be real people rather than simple properties which can be exploited.

A a few years ago a deal to sell Henson to Walt Disney was called off in the 11th hour because the Henson family members still involved in the company felt Disney's bureaucracy would crush the Muppet spirit. The challenge for EM.TV is to keep their entrepreneurial culture even as they start to play in the big media leagues.