Analysis: Kirch Creditors Looking at Collateral Damage

Pity the poor administrator who ends up with the nightmare task of sifting through the wreckage of debt-laden German media group Kirch.

KirchMedia, the company's core TV and rights unit, is expected to file for insolvency by early next week, leaving an insolvency practitioner to review the claims against the unit and match them against its assets.

It promises to be a thankless task.

The insolvency process gives preferential treatment to creditors with secured claims, but Kirch has collateralised some assets several times over and the administrator may have to use assets of insolvent KirchMedia to pay debt owed by a different part of the privately owned Kirch empire.

"The whole Kirch group is like a game of chess," an adviser to founder Leo Kirch has said. "Every man is related to every other man, no move is isolated from the previous or the next."

Of the group's consolidated debt pile of at least 6.5 billion euros ($5.7 billion), only KirchMedia's 2.2 billion euro debt and the Kirch pay-TV arm's 962 million euro debt are publicly disclosed.

Apart from the bank debt, Kirch companies owe each other money, while partners and suppliers have claims and contingent liabilities worth billions of euros against the group.

Pay Tv Seen Falling

Sources close to Kirch say a collapse of his loss-making pay-TV station Premiere is almost inevitable if KirchMedia files for insolvency, as an administrator would have to call in overdue payments from Premiere that KirchMedia has deferred.

On the other hand, Germany's largest commercial free-to-air broadcaster ProSiebenSat.1, a listed company controlled by KirchMedia, is more likely to be the most valuable asset an administrator would have to sell.

"There will be a long queue of bidders lining up if ProSieben goes up for sale," said Bernard Tubeileh, media analyst at Merrill Lynch in Frankfurt.

"Murdoch, Berlusconi, Vivendi, TF1, Granada, Carlton, German publishing houses, you name it. It would give all of them a once-in-a-lifetime chance to get into German TV seriously."

The wildcard in the game is Kirch's umbrella Taurus Holding, where much of the group's debt must be parked and which holds valuable assets such as Kirch's stakes in Formula One and publisher Axel Springer.

Springer Put Option The Trigger

When Kirch faced financial meltdown several times in the past decade, it managed to avert collapse by winning over minority investors willing to inject fresh capital.

But as it granted its investors the right to sell back their stakes, this scheme proved to be a time bomb as investors started to consider taking Kirch up on the contracts.

Axel Springer was the only one to get its claim logged before insolvency. It has an option to sell back to KirchMedia an 11.5 percent stake in ProSiebenSat.1 for 767 million euros due by end-April, more than three times the stake's current market value.

Sources close to Springer said the group, interested in a greater exposure to television, may be open to swapping the cash claim against an increased stake in ProSieben - a possibility after an insolvency filing.

Murdoch can exercise his option to sell back BSkyB's 22 percent stake in Kirch's pay TV arm for about 1.7 billion euros only in October, and the meltdown of the group may leave the tycoon, who wrote off the stake's value to zero, empty-handed.

"Cross-Collateralisation of Nothing"

Kirch and German film rights and merchandising firm EM.TV, founded and staffed by many ex-Kirch-employees, have multiple tangled business links that now expose EM.TV to the fallout of the Kirch collapse.

Kirch is a major buyer for EM.TV's children's television programming, which may dry up after an insolvency filing. The firms jointly own Junior TV, trading in children's TV rights.

Kirch bailed out EM.TV a year ago when it took over most of EM.TV's stake in the Formula One racing car circuit for $1.5 billion - a deal many analysts say was overpriced and the last nail in Kirch's coffin.

But it could also come back to haunt EM.TV now.

EM.TV agreed to put up as collateral its remaining 16 percent Formula One stake for the loan Kirch took to buy the majority in the racing car business, sources close to the deal told Reuters.

"You could call it the cross-collateralisation of nothing," one source said.

Started With Fellini

Leo Kirch built his empire on the base of the German rights to Federico Fellini's La Strada, and trading in movie and sports rights remained the core of his group for decades.

Kirch's most expensive supply contracts are thus with sports organisations and Hollywood movie studios. KirchMedia's last annual report says the liabilities from those long-term deals add up to 6.5-7.0 billion euros in the coming years.

Kirch has already missed several payments to the studios, including Viacom's Paramount and Sony's Columbia, worth some 400 million euros, a source close to the studios said. The studios are also open to debt-for-equity swaps, the source said.