It has all the ingredients of a made-for-TV drama. The star is an aging German tycoon, known for his obsessive secrecy, unbridled ambition and friends in high places — one of whom even has a shot at becoming Chancellor. Using a keen understanding of the public taste and an enormous appetite for risk taking, our hero builds a multibillion-dollar media empire, comprising TV stations, newspapers and rights to a library of cinema classics and sports events.
Then comes the twist in the tale: just as the mogul is preparing to turn to the equity markets to take his very privately held vision public, it all goes horribly wrong. Creditors come calling, demanding their loans back. Parts of the business lose money. The billionaire faces a financial bloodbath. Riveting stuff, right? Were his empire not under such dire pressure, Leo Kirch might have found something to appreciate in his current predicament.
These are tumultuous times for Kirch and his eponymous media empire, which is carrying up to $5 billion in bank debt and faces at least $2.1 billion in additional financial obligations. Kirchs investors and creditors are becoming twitchy, jockeying for position to salvage any slices from what may be a crumbling pie. Last week, Axel Springer, a German publishing concern, exercised a “put” option that required Kirch to purchase $662 million-worth of shares. Later this year, British TV station BSkyB, which has a $1.5 billion “put” option, may follow suit.
Kirchs empire is famously opaque and riddled with complicated corporate cross-holdings. “The whole Kirch group has various contracts with various players,” says Rolf Elgeti, a strategist at Commerzbank Securities. “Nobody really knows what is actually going on.” But if the dominoes begin to tumble, Kirch may have to give up significant parts of the conglomerate he built from scratch over more than four decades. And, should the controversy taint friends who helped him along the way, he may not be the only high-profile casualty. One of his staunchest backers is Edmund Stoiber, premier of Bavaria and the opposition candidate set to challenge Gerhard Schrder for the German chancellorship in September.
How did a businessman as smart as Kirch get into such a mess? Like media groups all over the world, the global economic downturn and the consequent slump in advertising have hurt the Kirch group. But most commentators trace his current troubles back to his foray in the 1990s into German pay-TV. Estimates suggest that by 1996, Kirch had invested close to $5 billion in digital technology and programming for pay-TV services. In 1999, he spent $1.27 billion to gain control of Premiere, his flagship pay-TV service. It was one risk too many. Since the start of 1999, KirchPayTV is thought to have lost at least $1.7 billion. Demand is sluggish; nine out of 10 German households get 30 channels via cable or satellite dishes, making pay-TV an expensive luxury.
Last week Axel Springer said it would exercise its $662 million “put” option to sell to Kirch an 11.5% stake in broadcaster ProSiebenSat.1 Media. (A “put” option is a risk-averse instrument that gives the holder the right to sell an asset at a predetermined price.) It demanded that the payment be settled by April. Kirch challenged the moves legality, since the deals structure was reportedly left open to accommodate changes in German tax law. But as with so many of Kirchs corporate dealings, there are subplots within subplots.
One of the Kirch empires main arms, KirchMedia already holds a 53.5% stake in ProSiebenSat.1, and is expected to merge with that company should a planned stockmarket float go ahead later this year. But another subgroup, KirchBeteiligungs, holds a 40% interest in Axel Springer. Why would Kirch permit a company in which it has such a sizable stake to cause it so much potential inconvenience? One theory is that the Springer family wants to reacquire shares in their company that Kirch bought in the late 1980s during a failed takeover attempt, and are exercising the “put” option as an arm-twisting tactic. But Kirchs shares in Axel Springer are pledged to the banks, as collateral for other loans. For some analysts, the Springer move is just good commercial sense. “If you have a chance to sell assets at far above market price, you do it,” says Oliver Rupprecht, an analyst at MM Warburg in Hamburg.
Things could get a lot worse for Kirch if Rupert Murdoch is thinking along the same lines. Rumors are constantly swirling that Murdoch may use Kirchs current debt problems to make an opportunistic grab for a greater share of the pie. And he may also have the instrument with which to do it. In 1999, Murdochs BSkyB bought into KirchPayTV. But it, too, negotiated a “put” option — come October, BSkyB can elect to sell back its 22% stake in KirchPayTV to Kirch for an estimated $1.5 billion, above market value. Murdoch may demand that Kirch pays up, or he may extract a different kind of price — greater control. “While there could be a strategic advantage in letting [Kirch] collapse,” says Elgeti, “its a safer option to try and get a controlling stake.”
It is not only the hovering presence of Murdoch, but other global TV powerhouses such as John Malones Liberty Media that may yet figure in Kirchs future plans. Last September, Malone bid for six of the nine regional German cable systems that incumbent operator Deutsche Telekom was forced by regulators to shed. He also made a play for Kirch, but withdrew after regulators expressed concern.
Where Kirch will next turn for help is uncertain. It would probably be a bad idea to approach Stoiber, who formally launched his campaign for the German chancellorship last month. Bayerische Landesbank — which is 50% owned by the Bavarian state, where Stoiber has been premier since 1993 — is Kirchs biggest lender, with an estimated $1.7 billion in loans. Last year, the regional government saw to it that the bank provided a loan for Kirch to acquire a stake in Formula One motor racing. But the banks massive exposure to the media empire has raised eyebrows, and political pundits say Kirchs current debt problems could embarrass Stoiber since hes touting sound economic management as one of his strengths. Thats a claim Leo Kirch may soon find hard to make.
More Must-Reads from TIME
- Inside Elon Musk’s War on Washington
- Why Do More Young Adults Have Cancer?
- Colman Domingo Leads With Radical Love
- 11 New Books to Read in February
- How to Get Better at Doing Things Alone
- Cecily Strong on Goober the Clown
- Column: The Rise of America’s Broligarchy
- Introducing the 2025 Closers
Contact us at letters@time.com