ProSiebenSat Takeover Approved – Now, On To SBS

Michael Hedges February 28, 2007

The European Commission quickly blessed the €billion buy-out of ProSiebenSat by buy-out behemoths Permira and Kohlberg, Kravis, Roberts (KKR). Quickly, too, will come the merger with SBS Broadcasting and, possibly, more.

In December those big private equity firms acquired 88% of the vote and 50.5% of equity for a mere €3.1 billion through Levena Holding 4 GmbH. Remaining public shareholders have until March 19th to sell their shares for €28.71 per share. One of those shareholders is German publisher Axel Springer, a suitor for ProSiebenSat that just could not get passed German competition authorities.

The same day the buy-out was approved, ProSiebenSat made public its 2006 financial picture – the company’s biggest pre-tax profit in its history.

KKR and Permira also own SBS Broadcasting. Separately Permira owns British TV producer All3Media. Both firms are invested in satellite distribution.

ProSiebenSat competes for German viewers with public broadcasters ARD and ZDF and, of course, RTL /Bertelsmann – Europe’s gigantic multi-media company.

Germany’s Media Competition Commission (KEK) issued a giant kein Problem!

Company shares traded higher (Tuesday) after Merrill Lynch affirmed the 2006 financial results – adding the stock to it’s “Europe 1” list - and exclaimed that the proposed merger with SBS Broadcasting would create “one of the best performing stock in media” in 2007. By Wednesday most of that gain was erased when the Chinese stock-exchange “re-valued.” (See Phil Stone’s article on media in China here.)

Merger, in the private equity world, is a useful euphemism. ProSiebenSat CEO Guillaume de Posch dismissed the “merger” idea with SBS Broadcasting, preferring the more matter-of-fact “take-over.” He said that would take place in third quarter 2007. When the ProSiebenSat/KKR/Permira deal was revealed by the excited Bavarian State Prime Minister Edmund Stoiber indications were that SBS Broadcasting would absorb ProSiebenSat. Times change.

“The (European) Commission’s examination of the proposed transaction showed that there are no horizontal overlaps between the activities of ProSiebenSat.1 and SBS,” the ruling noted. "The Commission concluded that there was no risk that the proposed transaction would allow the new entity to drive competitors out of the market or to discriminate against them.” What, ho! Full speed ahead!

The Commission also looked at Permira’s All3Media and, again, no problem.

Meanwhile ProSiebenSat is gobbling up film libraries, cutting new deals with Warner Brothers and Granada.

Underlying any combined SBS/ProSiebenSat strategy is the one basic truth of private equity deals: nothing stands still, particularly not the money. Private equity firms use other people’s money (OPM) for deals with clear exit plans. To raise more money for the next deal, the buy-out firms must have great relationships with the money side of life. Investors, bankers, insurance companies, pension funds and a wide variety of other financial partners leverage their own borrowing power knowing exactly when and how much they will be paid. Investor exits – pay-outs – must come from somewhere.

That “somewhere” is, quite possibly, breaking up SBS Broadcasting. Likely put up for auction first are those radio stations. About 40 in nine countries just don’t fit with a television distribution company. Conventional wisdom suggests a spin-off of the radio stations, in aggregate, might be floated at the mid-€ 700 millions, about one-third of the ProSiebenSat deal. Yes, that’s heavy cash but the private equity market is flush with it.

Spinning the radio stations into a new radio-only company is far more likely than finding a buyer among existing media companies with the proper international foot-print looking for a strategic investment of that scale. All are being extremely cautious, wary of their own well-being. For example, even after losing more than half its value, GCap – formerly known as the € billion radio company - does not have buyers pacing in front the big offices.

Next to go could be the local terrestrial TV stations. With interests in satellite companies PanAmSat/IntelSat, KKR/Permira seems far more likely to concentrate on cable TV with digital offerings of blockbuster programming. Signing up cable companies for €10 per month per subscriber is far, far easier than paying for the infrastructures to sell local, regional or even national advertising, particularly when ad buyers are always arguing about the internet. There’s not a major media CEO in the world who wants to have another meeting with the ad people.

Strategic investors – certainly those invested in terrestrial broadcasting and the print sectors – are balancing demands for increased revenue from their own shareholders with general insecurity about the media sector’s direction. Financial investors – the private equity firms – are far less conflicted: Where’s the money?