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Monday, 8 April, 2002, 10:12 GMT 11:12 UK
Media giant falls back to earth
The front gate of Kirch HQ near Munich
Kirch staff are worried their jobs may be on the line
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By Jeremy Scott-Joynt
BBC News Online business reporter
line
Leo Kirch is 75. He is partially blind, is missing several toes lost as a side-effect of diabetes, and has a history of heart disease.

He has also retained a hammerlock on German broadcasting for more than three decades, thanks to his control of vast swathes of TV programmes and movies.

Kirch Gruppe's debts
BayernLB:
1.9bn euros
Deutsche Bank:
700m euros
HVB:
460m euros
Dresdner Bank:
460m euros
DZ Bank:
400m euros
Commerzbank:
350m euros
Lehman Bros:
250-300m euros
JP Morgan Chase:
250-300m euros
Germany's prestigious Bundesliga, one of the top football leagues in the world, is dependent on the billions of euros Kirch Gruppe has promised it for TV rights.

Add Mr Kirch's close links to right-wing German politicians, and the picture of power is complete.

But not anymore.

a complex network of ambitious deals has begun to fray and fall apart, the house that Mr Kirch built has imploded.

The old, old story

In a way, it all feels frighteningly cliched - rags-to-riches, followed by hubris and a fall from grace.

Leo Kirch
Kirch: the ultimate rags-to-riches tale?

In 1956, Leo Kirch was trying to start out as a film importer, driving round Germany in a clapped-out Volkswagen and, on occasion, sleeping in it to save on the cost of lodging.

That year his wife's family lent him $58,000 to buy the rights to Federico Fellini's La Strada.

Three years later came what he later called in an interview his first big deal - borrowing $2.7m to buy the rights to 400 films from United Artists/Warner Bros.

He gambled that Germany's public TV networks - at that point only prepared to do a deal a third as big - would have to come back for more.

They did, and thus began the big buy-up of everything from German dubbing rights for Star Trek to blockbuster movies such as Lawrence of Arabia.

In the driving seat

By the 1970s, German TV was deeply in his thrall.

Kirch Gruppe employed thousands in the politically important southern state of Bavaria.

The KirchGruppe web
Taurus Holding:
100% owned by Kirch Foundation

KirchMedia:
72.6% owned by Taurus; other owners include Berlusconi and Murdoch. Includes rights libraries and 52% of ProSieben Sat 1 channel

KirchPayTV:
69.8% owned by Taurus, 22% by BSkyB; includes Premiere. Lost 865m euros in 2001

Kirchbeteiligung
100% owned by Taurus, holds stakes in Axel Springer and Formula One

Its politicians were close friends of the deeply conservative media baron, as was Helmut Kohl, German chancellor from 1982 to 2000.

As German TV was liberalised in the 1980s his power grew further, as he moved from selling content to becoming a broadcaster himself with Sat 1 satellite channel.

By the 1990s, pay-TV beckoned, and the Premiere World digital channel was created.

The Kirch billions swept up sports rights too, including both the 2002 and 2006 World Cup and the Bundesliga football league, as well as buying into Formula One motor racing.

Tangled web

But empire building costs money. Lots of it.

Kirch Gruppe paid its way by creating a staggeringly convoluted network of deals, loans - the group has debts of more than 6.5bn euros - and subsidiaries.

And the tapestry is so complex that even with protection from creditors, the many banks and other stakeholders trying to stitch together some means of rescue have a tough task ahead of them.

The trigger for the collapse is pay-TV. Kirch has driven more than 3bn euros into Premiere for just 2.4 million subscribers, and the enterprise is losing 2.3m euros a day.

Germans, long used to cheap multi-channel cable packages, have not seen the need to pay extra for Premiere's offering.

The 1.5bn euros for Formula One, another 1.5bn for the Bundesliga, yet more for World Cup rights - and a commitment to pay 2.6bn by 2006 for film rights - now seem exorbitant.

Formula One champion Michael Schumacher
Formula One: an expensive jewel in Kirch's crown

And as other media operations have found to their cost, the hyperinflation in sports rights following the early 1990s success of Rupert Murdoch's BSkyB in the UK, and the consequent hopes of broadcasters for big buck sales, has far outstripped the public's interest.

Dog eat dog

Kirch might have been able to struggle on a while longer.

But in January Axel Springer, another German media group in which Kirch has a 40% stake, exercised its right to sell its 11.5% of ProSieben Sat 1 back to Kirch.

This "put option" means Springer could claim its original investment back: 767m euros, much more than current market value.

BSkyB followed suit, using its own put option to demand 1.7bn euros for a 22.5% stake in KirchPayTV, the vehicle for Premiere.

Suddenly Kirch Gruppe started to come apart at the seams.

Kirch Gruppe started to mutter about offloading Formula One among other assets. Leo Kirch has even accepted he will have to give up his control over his empire.

By March, it was clear that Kirch Gruppe needed 150m euros simply to meet its obligations in March and April.

A 460m euro loan from Dresdner Bank is due next week. And Kirch has run out of money.

Collateral damage

After weeks of talks, the final descent into insolvency could leave Kirch in the hands of its banks.

That, at least, should keep out both Mr Murdoch and Silvio Berlusconi, prime minister of Italy and himself a media magnate - both of which are creditors and have been eyeing an entree into Germany.

Bayern Munich
German football relies on the Kirch billions

But the insolvency still leaves the question of what could be brought down with Kirch.

The Bundesliga is the most obvious candidate. Kirch is committed to 100m euro payments in May and August, which it is highly unlikely to be able to make.

Footballers' ever-swelling pay packets mean German football, like that in the UK, is dependent on TV money.

And just as in the UK, where ITV Digital's poverty could threaten dozens of Football League clubs, some German clubs say they are staring collapse in the face.

Chancellor Gerhard Schroeder is now talking about a 200m euro fund to help bail them out.

World Cup rights, on the other hand, have already been moved into a separate company, sources say, to keep them out of administration.

Political fallout

And the Kirch saga could even impact the German government.

Bavaria, Kirch's home state, is run by Christian Social Union leader Edmund Stoiber, a candidate for the German chancellorship in September's elections.

His appeal rests on the fact that while Germany as a whole is stuttering economically, Bavaria is doing rather well.

But Mr Stoiber may come to regret the support he has shown his old friend.

The Bayerisches Landesbank, 50% owned controlled by the state government, has loaned him 1.9bn euros.

The CSU, as the government, has a majority on the board and is therefore - say some - ultimately accountable for piling money into Kirch when no-one else would take the risk.

Mr Stoiber is unsurprisingly keen to talk up the chances of a bank takeover. If Kirch's Bavarian jobs evaporate and the company slides into oblivion, his reputation for economic competence could take a fatal tumble.

See also:

05 Apr 02 | Business
Kirch insolvency fears grow
03 Apr 02 | Business
Q&A: Kirch's insolvency
28 Mar 02 | Business
Kirch holds breath as talks break up
27 Mar 02 | Business
Berlusconi firm 'abandons' Kirch
26 Mar 02 | Business
Kirch empire nears break-up
20 Mar 02 | Europe
German media giant sheds jobs
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