Kirch Media, GermanyMade By- Vinita Taneja

Introduction• . Kirch Media – the primary subsidiary of Bavarian-based Kirch Gruppe

– was created in the 1970s as a programming and entertainment distribution company.

• Leo Kirch, CEO of privately-held Kirch Gruppe and an insider in Germany’s political and economic circles, operated his business empire with a high degree of secrecy and opacity. In 1984 the German government relinquished its own television monopoly, and Kirch created a broadcaster, Pro Sieben Sat.1, as a viable competitor.

• Kirch ultimately built Sat.1 into the second largest private broadcaster in Germany. It also entered the digital pay-television market in the mid-1990s; although Kirch had very high expectations for the venture, digital television services ultimately led to the company’s downfall.

• In fact, the company invested nearly US$3 billion over several years to develop the platform, but failed to gauge demand properly, signing up only 100,000 subscribers

• There was no rational financial basis for continuing to lend to such a poor credit risk, many have pointed to government pressures and political influence as the driving forces.

• Stoiber, the head of the Bavarian state government, and Kirch were close friends, and Stoiber’s CSU party instructed the state-owned Landesbanks to continue lending to Kirch.

• By funding Kirch’s ill-advised projects through state-owned banks, the government was able to ensure the availability of jobs in a state beset by growing economic and unemployment problems.

• Hypovereinsbank and Bayerische Landesbank, the state-owned Landesbanks, were thus in a difficult position: although they were “instructed” to lend to Kirch Media, any collapse could lead to the loss of privileges they enjoyed in making risky loans using taxpayer funds.

Case Summary• Many potential subscribers were put off when Kirch attempted

to pass along the cost of the expensive digital set decoders. The leverage required to fund the project, coupled with poor demand, created significant financial and cash flow pressures.

• Financial flexibility was constrained even further when Kirch purchased broadcast rights for movies and sports events from various foreign media companies; although they were important from a programming perspective, the commitment amounts (US$2.6 billion through 2006) were simply too large for Kirch Media to handle without further jeopardizing its financial profile.

• In fact, by the late 1990s the firm’s leverage was becoming increasingly difficult to manage. Despite a growing debt burden and obviously weakened financial state, the company continued to raise enough money to keep operating.

• Kirch’s financial pressures mounted in early 2002 as Axel exercised a US$670 million put option requiring the company to purchase Axel’s share of Sat.1. The payment, along with additional sums due under the foreign rights project, US$480 million in trading rights payable to soccer clubs, the cost of carrying the digital television network (estimated at US$1 million a day), and interest payments on US$8 billion of debt, made it increasingly difficult for the firm to continue.

• Realizing that insolvency would follow without drastic restructuring, Kirch called in administrators to help with the growing crisis.

• The team created a plan in February 2002 that would merge Kirch Media with Sat.1. Under the reorganization a new firm would have two arms: Kirch Media, responsible for rights trading, programming, production, and technology, and Sat.1, responsible for television broadcasting and multimedia.

• The deal was postponed, and despite the presence of multiple stakeholders that were interested in keeping Kirch operating as a going concern, the firm’s debt burden proved to be too much. Kirch Media filed for bankruptcy in April 2002, opting for insolvency protection under self-administration.

• Since aspects of the company remained valuable, administrators believed they could reorganize, rather than liquidate, the company. A possible sale of the core of the firm to a group including publisher Bauer Verlag and various creditor banks fell through in December 2002 because of a disagreement over price. In early March 2003 competing bids were submitted by TV Française 1 and private interests, which valued the company at approximately €2 billion; a private investor group readied a final purchase agreement in mid-2003.

Governance flaws

• Kirch Gruppe and Kirch Media were vague in their financial disclosures, preserving a considerable amount of opacity. This was to the detriment of stakeholders, who found it difficult to know the company’s true financial position. The organizational and shareholding structure of the firm was convoluted.

• Although Kirch Media was controlled by private interests it was being supported, de facto, by a base of taxpayers who had little notion about the firm, its operations, or its financial status. The company embarked on an ill-advised and expensive digital television and programming strategy that does not appear to have been grounded in realistic supply and demand projections.

• Many of the transactions Kirch entered into represented extremely large, multi-year commitments that severely reduced financial flexibility. Leverage was permitted to grow rapidly and soon became too large for the firm to manage.

• Board directors and bankers appear to have supported the massive leverage throughout, initially on a “voluntary” basis and ultimately on a “directed” basis. Conflicts of interest arose between government officials, bankers, and the company.

• AAA-rated banks, under the direction of government officials, were instructed to lend to a junk-rated credit using taxpayer funds in order to ensure a continued employment base. External forces (such as politicians) seeking to achieve other political goals may have caused other stakeholders, including state taxpayers, pay for the flawed strategies and excesses of the company.