BSkyB to Buy Stake in German Broadcaster

British Sky Broadcasting Group agreed to buy about one-quarter of the pay-TV unit of Germany’s Kirch Group for $1.5 billion to expand into Europe’s largest market.

Europe’s second-largest pay-TV company will pay about $500 million in cash for KirchPayTV, raising the money by selling new stock. BSkyB also will issue 78 million new shares to the German unit, a 4.3% stake worth $996 million at Friday’s closing price.

BSkyB, 40% owned by Rupert Murdoch’s News Corp., is targeting Germany as competition from rivals such as Carlton Communications and Granada Group increases at home. KirchPayTV hopes to double users of its Premiere pay-TV channel to 4.6 million by 2003.

“Through targeted transfer of know-how in sales and marketing, we will now proceed with the buildup of the German digital subscription market,” KirchPayTV management board member Markus Tellenbach said.

By 2002, more than half of Europe’s 182 million TV homes will subscribe to pay services as viewers are enticed by new digital offerings, according to research by Zenith Media.

The acquisition is BSkyB’s first outside of Britain, where one-third of homes have pay television, and Ireland. Closely held Kirch, Germany’s second-biggest media company, transmits to about 6% of German homes.

Selling pay TV in Germany is difficult because basic cable subscriptions include 50 free channels. To entice subscribers, Premiere is creating unique channels, such as a music channel being developed with Viacom Inc.’s MTV Networks.

BSkyB and Kirch have been in talks since October and said they may sell shares in KirchPayTV in 2003. The agreement is expected to dilute BSkyB’s earnings until 2002, when KirchPayTV is seen breaking even, Finance Director Martin Stewart told Bloomberg News.

Dieter Hahn, a management board member at Kirch Group and a supervisory board member of KirchPayTV, will also become a non-executive director of BSkyB.

Kirch has been hunting for cash for the unit, Germany’s largest pay-TV provider, as it expects to rack up nearly $1 billion in start-up costs before breaking even. Late last month, Kirch agreed to borrow $1.5 billion from Chase Manhattan Bank and a group of German banks after shelving a junk bond sale earlier this year for lack of interest.

Standard & Poor’s warned in October that it might cut BSkyB’s credit rating after talks with Kirch were confirmed.

Even though the investment is partly made in shares, “there is a significant possibility that BSkyB will be unable to retain its ratings because of uncertainty over KirchPayTV’s future funding needs before reaching profitability,” the rating agency said before the agreement was announced.

BSkyB’s Stewart said his company would speak to the agencies.

“We’ve had an initial conversation with the rating agencies,” he said. “We will be meeting with them this week and we hope they recognize the long-term growth prospects.”

News Corp., which already has stakes in an Italian pay-TV business and in German free television channels Vox and TM3, has held unsuccessful talks with Kirch several times in the past.

At the beginning of the year, News Corp. was involved in discussions that eventually led to a joint venture between Kirch and Mediaset, Italy’s No. 1 commercial TV company, to cooperate on buying TV rights and selling advertising. News Corp. was excluded from the agreement because it lacked European free-TV businesses that could be included in the venture.