A Big Score for Murdoch?

He may win KirchMedia. Then he'll have to make it work

As he built a media empire that stretched from Britain to the U.S. to China, there was always a big empty spot on Rupert Murdoch's map: Europe. The chairman and CEO of News Corp. (NWS ) never managed to stake out much real estate on the Continent. His few attempts mostly ended badly, such as German commercial TV broadcaster VOX. After years of losses, Murdoch sold his stake to Bertelsmann in 1999.

Now there are signs that Murdoch will finally triumph in Munich. He is poised to acquire control of Germany's KirchMedia, the main holding company of media baron Leo Kirch. Among the prize assets are Kirch's legendary film archive, a publicly traded group of commercial TV stations known as ProSiebenSat.1 Media, and popular programs such as comedy show TV total. Talks among creditors and investors could still fall apart. But the odds are good that Murdoch, 71, will snatch control of half the commercial TV market in Germany.

The wily Aussie is in a prime position. Fininvest, the media company of Italian Prime Minister Silvio Berlusconi, U.S. investment bank Lehman Brothers, and Saudi investor Prince Alwaleed are all working with creditor banks to prevent an outright bankruptcy, which would wipe out their investments. Although Fininvest may covet a leadership role, the betting is that Murdoch's News Corp. is best poised to extract a profit from KirchMedia. Neither Murdoch nor Fininvest would comment.

The groundwork for Murdoch's daring conquest was laid back in 2000. That's when his British broadcasting business, BSkyB (BSY ), invested $1.4 billion in KirchPayTV. Now that Kirch is too financially strapped to honor a promise to buy back the 22% stake, Murdoch may leverage his stake into control of Kirch's other assets. "It's a one-time opportunity to get into Germany," says an analyst.

Other creditors may legally have more claim to Kirch assets, but most of them are banks incapable of managing a media company. Sources close to the talks say German banks, including HypoVereinsbank and Commerzbank (CRZBY ), will settle for veto power while allowing Murdoch to run the show. "At the end of the day, whatever Murdoch has done, he was commercially successful," says an industry source.

But even if Murdoch prevails, the deal could fall apart in a matter of weeks. Murdoch and Kirch's creditor banks have set a deadline of six weeks to renegotiate the numerous contracts Kirch inked with suppliers of TV programming, from big Hollywood film studios to the Wolfsburg soccer club. If talks drag on longer, Kirch's cash-flow problems will force it into bankruptcy. The Hollywood studios, owed an estimated $2.6 billion, and sports teams have an incentive to keep their best German customer from going under. But if Murdoch bids too low, they might gamble on putting the rights up for auction again.

Even if Murdoch can strike a deal, he will have plenty more to worry about. German limits on market share in television could block Murdoch's future growth. Regulators' concerns about market dominance already stymied U.S. cable entrepreneur John C. Malone's attempts to move into Germany. And local officials regard Murdoch and his brand of tabloid TV warily. "He has a different concept of television," says Norbert Schneider, chairman of Germany's State Media Authorities Directors Conference.

Finally, Murdoch will have to get a grip on Kirch's businesses. Several of the TV stations in ProSiebenSat.1 Media are big money-losers, and the group as a whole is only marginally profitable. Murdoch will also have to decide what to do with KirchPayTV, which is hemorrhaging money. Shutting it down would be only a partial solution since Kirch is obligated to pay for the unit's programming regardless. Murdoch must also bring costs under control--always a Kirch weak point. Murdoch is probably savvy enough to hire local managers to run the German businesses. Already, there is speculation that he will turn to Georg Kofler, who made Kirch's flagship TV station profitable when he ran it during the 1990s. Murdoch may have bested the legendary Leo Kirch. Now, he has to win over Germany.

By Jack Ewing in Frankfurt, with Kerry Capell in London

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