Kirch Media Set to Be Pared Down to the Core

Advisers have recommended that the company succeeding the insolvent Kirch Media holding group should essentially be pared down to its original core business of film rights trading plus its majority stake in listed television group Pro Sieben Sat 1 Media AG, Handelsblatt has learned.

The advisers presented a restructuring proposal earlier in the week to the group's two top executives, Wolfgang van Betteray and Hans-Joachim Ziems, as well as provisional insolvency administrator Michael Jaffé.

The plan provides for the cession of 66% of the group's activities, measured in terms of their capacity for revenue generation, in film and television production. Only the most high-earning entertainment production units are to be retained, according to the plan, while the units that are to be disposed of include NDF Neue Deutsche, production firm PlazamediaFilmgesellschaft and sport channel DSF.

Van Betteray, Ziems and Jaffé are under time pressure to agree on a restructuring plan. They have two weeks at the most before insolvency proceedings are set to be opened.

When this happens, a rescue company - or more than one rescue companies - will be set up to absorb the businesses that are seen to be worth keeping. The remaining businesses will be sold off individually.

Under one proposal that's under consideration, a separate rescue company is to be set up purely for Kirch Media's activities in sports rights trading, the area in which the group had been most expansive in its last months before insolvency. Consideration is being given to the idea of paring down the sports rights business to the profitable big events such as the soccer World Cup or the Olympic games.

Investment bank UBS Warburg has been charged with the task of finding a buyer for the rescue company or companies, and it has reportedly received 55 offers.

The parties that have expressed interest include big Hollywood studios, financial investors and European media groups. The selection process is set to get underway at the end of June.

One major obstacle to an agreement is likely to be the differences between Kirch Media's own estimates of the value of founder Leo Kirch's massive film rights library and potential buyers' estimates of its worth. In the last available Kirch Media balance sheet, the library's value is recorded as around 3 billion euro. "The value is likely to be cut massively," according to people close to the negotiations.

According to reports, only one third to a half of the film rights have any real worth at all. If the library fails to fetch a good price, it will come as a blow to Kirch Media's creditor-banks, since the group used the library as collateral against its loans.

In a separate development on Thursday, the regional court in Munich ruled that the Kirch Group media conglomerate - of which Kirch Media is a part - can retain control of its 40% stake in Europe's largest newspaper publishing house, Axel Springer Verlag, until August 30. But if the media group fails to repay its loan of 720 million euro to Deutsche Bank by that date, it must not challenge the bank's right to seize the stake.

At the start of this year, Deutsche's chief executive, Rolf Breuer, publicly cast doubt on Kirch Group's creditworthiness.

Kirch's lawyers, Peter Gauweiler and Wolf-Rüdiger Bub, argued that this statement had affected the group's reputation, and thereby hastened its demise. Thursday's ruling suggests that the court was not totally unreceptive to this line of argument.

The ruling means that Deutsche will not, for now, be able to go ahead with plans to float the Springer shares on the stock market after the summer recess. On Wednesday, it was revealed that the plan had received the blessing of three banks who hold the right of veto: Bayerische Landesbank (BayernLB), Lehman Brothers and JP Morgan Chase.

Kirch used the Springer stake as collateral against Deutsche's loan but also against a loan of 1.6 billion euro issued by BayernLB, Lehman Brothers and JP Morgan Chase. In this connection, it has become customary to refer to this group of three banks as the Formula One banks, because the loan was used to buy Kirch's stake in the Formula One racing tournament.

Deutsche was granted first right to the Springer shares, giving it the right to dispose of the shares if, as happened, Kirch failed to service its debt. But the Formula One banks were granted second right, giving them the power to veto any plans Deutsche puts forward for the shares. Furthermore, they also have the right to take in any funds raised over and and above the sum that Deutsche is owed.

Banking insiders were expecting an excess of around 50 million euro, since the share issue was expected to rake in almost 800 million euro - a sum that would almost certainly have made it Germany's largest public offering by far this year.