News Corp pays to right German pay TV Premiere

Michael Hedges March 1, 2009

The power of powerful media organizations is in gaming financial and strategic investments for maximum value. Turbulence only makes the game more interesting. News Corporation may set adrift investments, even good ones, but rarely does it scuttle one it believes in.

And News Corp seems to have no intention of scuttling loss-making German pay TV company Premiere even though the boat is rocking. New Premiere CEO Mark Williams faced shareholders in Munich (February 26), some rather angry, with a commitment and a plan. Recapitalization - €412 million from News Corp – will, he said, make possible “the necessary investments in the areas of program marketing and sales, customer service and technology to reach the needed increase in subscriber numbers.” News Corp supplied €38 million in January bringing its total in the recapitalization to €450 million.

“2008 was a very difficult year”, he said in a release. “The long-term financing structure agreed in December 2008 with News Corp and our bank syndicate was key to our survival.” Williams announced a 2008 loss of €269.4 million on €941.1 million revenue. Premiere’s share price has effectively tanked, falling last week to less than €2. Share price, of course, reflects the betting pool and not a company’s value.

Recapitalization plans have been in the works since last December, swapping old debt for new debt guaranteed by News Corp. It’s the third recapitalization of Premiere since 2005. Debts currently exceed €300 million.

A few days before the Premiere shareholders meeting the company set adrift free to air Giga TV, a specialized talk channel for internet, games and computer fans. Last year News Corporation reversed central and eastern European development plans, putting Bulgarian broadcaster bTV up for sale, walking away from a granted Montenegro license and bringing in advisors to shop the rest.

Another bit of tidying up was Premiere’s buyout of minority shareholders in premium cable bouquet Premiere Star. Turner Broadcasting and other shareholders accepted deferred consideration payable over the next four years.

It was but 14 months ago (January 2008) that News Corp reentered the German television market paying €287 million for just under 15% of Premiere. It was James Murdoch’s first major deal after being elevated to the top job at News Corp for Europe and Asia. Mark Williams, News Corp Europe and Asia CFO and CEO of Sky Italia, was named Premiere CEO (September 10) after Michael Börnicke resigned ‘for personal reasons.”

In short order News Corp has increased its equity in Premiere to 29%, just short of tripping German trading rules that force full tender of all shares, which News Corp certainly wanted to avoid when share were trading at €30. The German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin)would need to grant an exemption for News Corp to hold 30% or greater of the share capital in Premiere. News Corp asked for that exemption, which is not particularly extraordinary due to the financial reorganization necessary, and it was granted January 30th. The recapitalization approved last week was a condition for the BaFin waiver. After all the paperwork and News Corps money transferred it will hold slightly more than 50% of premiere.

A decade ago BSkyB, controlled by News Corp, spent €1.3 billion for 24% of KirchPayTV. When Kirch Media sank three years later, News Corp could only watch the money float away.

Pay TV has been slow to excite German households. Public broadcasters ARD and ZDF offer 22 free to air channels for which German households pay an annual license fee. In addition there are over 100 other free to air channels available. In announcing 2008 results (February 16) Premiere CEO Williams said subscribers dropped to 2.39 million from 2.51 million in 2007. Cable operator Kabel Deutschland (KDG) announced 2008 subscribers at 11.36 million and pay TV subscribers at 846, 300. KDG posted a €28 million loss for 2008. Williams told the assembled shareholders 3 to 3.4 million subscribers would make Premiere profitable. He said he’d be spending €65 million on marketing and new subscriber acquisition.

Premiere and News Corp are counting, literally and figuratively, on pay per view sports.  In November Premiere secured Bundesliga football rights – every tiny bit – through the 2012/2013 seasons at about €500 million. Rights include cable and satellite broadcasts in Germany, Austria and Switzerland, internet streaming and even bars and hotels. Premiere also has rights for UEFA Champions League and FIFA 2010 World Cup. Premiere will offer non-subscribers access to the match broadcasts online on a pay per view basis.

The Premiere shareholders approved the capital restructure, objections of some duly noted. But it was not without noticeable grumpiness, understandable considering the share price loss. "We were lied to by management and have been deceived," said one, referring to a couple of departed Premiere executives and a few fudged numbers. Others complained that the lectern was too small, lunch removed too quickly and that Mark Williams spoke in English.

Ah, the shareholders; what would we do without them? News Corp seems ready to set them adrift.