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JANUARY 31, 2002

Kirch under pressure

BERNIE ECCLESTONE turned Formula 1 into a goldmine for himself but those who have tried to follow in his footsteps have suffered. Morgan Grenfell Private Equity started the ball rolling in October 1999 when it paid Ecclestone $325m for a 12.5% share of SLEC, the parent company of the Formula One group of companies. MGPE agreed an option to buy another 37.5% for $975m but could not raise the money in the time needed and Ecclestone then sold the 37.5% to Californian investment house Hellman & Friedman.

Hellman & Friedman and Morgan Grenfell decided to join forces and sold the 50% interest in SLEC to Thomas Haffa's EM.TV for $712.5m in cash and $880m in EM.TV shares. Haffa also agreed an option with Ecclestone to buy another 25% of SLEC for an additional $987.5m.

Unfortunately for all concerned EM.TV then hit in trouble and its share price plummeted. Hellman & Friedman sold their shares and just about broke even on the deal but MGPE found itself having lost more than $300m. This was one of the reasons that MGPE's parent company Deutsche Bank decided to close down its subsidiary...

To try to keep EM.TV afloat Haffa sold 49% of his 50% in SLEC to Kirch Media. He got $586m. Kirch also agreed to take over the EM.TV option to buy control of SLEC. He raised the $987.5m and there was a further investment needed to secure the commercial rights to F1 from the FIA for 100 years. This cost another $300m. He also has to pay off the Eurobond which SLEC negotiated early in 1999. This was to be for $1.4bn although only around $1bn has to be paid back. The problem is that the owners of the bonds can start to redeem them in May 2002 at which point they will be entitled to 1.3% interest per annum for three years. After that the interest payments rise and from May 2004 bond owners are entitled to 3% per annum.

Kirch's investment in F1 should thus be in the region of $2.5bn but he will then have the commercial rights to F1 for 100 years - except that F1 is worthless without the agreement of the teams and they say they want more money. The automobile manufacturers are even saying that they will start their own World Championship if they do not get a much better deal from Kirch. And while all this is going on Kirch is still struggling to make pay-TV work. The recession has arrived and revenues are down. Banks do not want to lend the group any more money (Kirch is believed to have debts of around $5bn) and now banks are beginning to demand that Kirch pays back some of his existing loans. Matters are further confused by the fact that Kirch took on a variety of partners along the way to help pay for his purchases. As part of those deals he agreed to "put" options to buy out the other investors at a set price.

Now those options are coming home to roost: Axel Springer AG wants to be paid $664m by the end of April as agreed for a 11.5% share in Kirch's ProSiebenSat1 TV station. In addition the Dresdner Bank is expecting a $400m repayment from Kirch at the end of April and has already agreed to delay the payment.

Worse than that in a few months Rupert Murdoch of News Corporation is going to be asking for around $1.5bn for the "put" option he has on a 22% share in Kirch's Premiere pay-TV company.

Kirch is under pressure. The Springer problem can be solved as Kirch owns 40% of that company but at the moment Kirch says that there will be debt-for-equity deal.

Kirch is famous for his ability to survive but things are looking more and more difficult and Kirch may be forced to give up control of parts of his empire... and who knows what that will mean for Formula 1?