Premiere Pay TV's About-Face

Creditors and analysts could hardly believe their ears when Georg Kofler took over the reins at Germany's troubled pay television broadcaster Premiere three years ago.

Saddled with a debt estimated at around €4 billion ($5.2 billion) and a subscriber count that had stagnated in a country famous for rejecting pay TV, the money-losing machine was considered one of the causes of the collapse of Leo Kirch's media empire.

Kofler, on the other hand, called it "the most exciting temptation since the invention of television," upon his appointment as CEO of the sinking ship on Feb. 1, 2002.

"My instinct tells me we can still make a success story," he told reporters at the time.

Righting the ship

Since then, the gregarious 47-year-old has proved his instinct right and his critics wrong. Last fall, the company reported an operating profit for the first time in its history. Though Premiere still recorded a net loss of €80.6 million after taxes and interest, the subscriber count is climbing and Kofler's self-confidence is so high that he plans to float Premiere on the stock exchange on March 9.

"We now have the big chance at making Premiere strong and able to take action in the future," Kofler said in a statement released when the company shares went on sale on Feb. 23.

Premiere and its owners, including Kofler and the London-based buyout fund Permira, will sell 42.1 million shares at €24 to €28, making the IPO worth up to €1.2 billion. Twelve million new shares will raise more than €300 million, which will go toward paying off the company's €431 million debt and readying itself for what analysts say will be increasing competition.

"Now is the last possible moment to do something like this," said Helmut Thoma, a former head of RTL Television in Germany. "From now on the competition will get tougher."

Clouds looming on the horizon

Premier's quasi-monopoly in Germany looks to soon be disrupted by pay TV ventures by private channels like ProSiebenSat1 and RTL, which are looking to compensate for declining ad revenue at their existing stations. In addition, the growing digitization of Germany's cable network will increase the number of channels available and lower costs for digital broadcasters.

Premiere's reach could increase in this period, said analyst Martin Fabel of consultancy firm AT Kearney, in Berlin.

"At the same time, it creates an awful lot of competition," he said.

It's something the company hasn't had since Kirch bought up a competitor pay TV station run by Bertelsmann to form Premiere in 1996. Though securing exclusive rights to broadcast Bundesliga games and blockbuster Hollywood movies, Premier managed to attract only 2.4 million customers by 2002. The operating costs, on the other hand, topped €1.6 billion, according to Premiere figures.

Bad marketing in a tough market

Analysts lay the blame for the low subscriber count on bad marketing and a television public so pampered by a large selection of free television programming and channels that it doesn't see the need to pay extra money each month.

"Pay TV is not very easy to sell anyway in Germany, and none of the subscriber targets were hit, so you had a double whammy: the platform was pretty small and the average revenue was low," said Guy Bisson, senior analyst at the market research publication Screen Digest in London.

The large debt, said Bisson, was connected to impossibly expensive movie rights deals that Kirch had negotiated with Hollywood studios.

When Kofler came on, one of his first moves was to fly to Los Angeles and re-negotiate the rights deals. He then fired almost half of the staff of 2,400 and bought up 20 percent of the company for an estimated €35 million. By 2003, he got Permira to lead a group of investors in injecting €220 million into the broadcaster. The subscriber count has climbed since then to 3.5 million and the operating costs cut to €901 million.

The Kofler show

For the past week, Kofler has been spreading the good news to potential private and institutional investors in Germany and Austria, his campaign supplemented with television and print ads. His "Roadshow" as the company has advertised it, made stops in London, New York and Boston as well.

How well the shares do once the company goes public depends on how many more customers will be willing to pay up to €43 a month for Premiere's services. The new competition from other pay TV channels, while not seriously challenging Premiere's hegemony, will drive up the movie rights and exclusive rights to televise Germany's Bundesliga games, say analysts.

"The content will be more expensive as of right now," said Fabel. "Which isn't good news for the stock."