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The Muppet Show won't belong to EM.TV until 2050

Courtesy of EM.TV & Merchandising AG
February 16, 2001

German media company EM.TV & Merchandising AG is adding two more surprises to the series of shocks that have sent its shares into a sharp decline in recent months.

In one, EM.TV Chief Executive Thomas Haffa last year agreed to pay 95 million marks (48.6 million euros) for limited and long-deferred rights to a number of television programs that people familiar with the deal said will probably have little broadcasting value. According to these people, EM.TV's supervisory and management boards didn't learn of the contract for 10 months after the fact.

In the other, these people said, EM.TV booked revenue in 1999 from a contract that auditors reviewing accounts at the end of the year couldn't find. It didn't turn up until several months into 2000, though it was dated Dec. 24, 1999.

EM.TV's share price is down more than 90% since September. The company jarred shareholders by first miscalculating earnings, then slashing its 2000 profit forecast and finally acknowledging that both Mr. Haffa and his brother Florian, EM.TV's chief financial officer until he left the company in December, had sold stock in violation of agreements with EM.TV's banks. Both Haffas are under investigation by the Munich state prosecutor for possible fraud and insider trading.

The other party in both the just-revealed contracts, the same people said, is the Kirch Group, Europe's largest pay-television company and one with many ties to EM.TV. Most recently the two have been trying to negotiate a rescue alliance for EM.TV that would give Kirch a piece of EM.TV's holding in the Formula One auto racing circuit.

Spokesmen for both EM.TV and Kirch declined to comment. There was no answer at Mr. Haffa's home.

The alliance talks are faltering, and the revelation of these two deals probably won't help. On Wednesday, Mr. Haffa's three colleagues on EM.TV's management board were ready to present the chief executive with a resolution to seek other bids for the Formula One stake.

That would open the door for talks with U.S. investment firm Hellman & Friedman LLC or French financier Robert Louis Dreyfus. Both want to make an offer for the Formula One stake but have been blocked by an agreement Mr. Haffa made to negotiate exclusively with Kirch.

EM.TV, whose main business is licensing cartoons to TV stations, was once one of Europe's hottest stock-market stars. But it piled up more than $2 billion (2.17 billion euros) in debt early last year to buy 50% of SLEC, the Formula One holding company, and all of Jim Henson Co., creator of the Muppets characters. The emergence of the two little-known Kirch contracts is likely to renew questions about the company's accounting methods, and fuel shareholder ire.

In the first contract, Mr. Haffa agreed to pay 95 million marks for about a dozen Jim Henson television progams whose rights in German-speaking countries have been held by Kirch for years, people familiar with the deal said. Although Kirch can ask for the money now, EM.TV can't license most of the shows to broadcasters for 10 years or more, they said. And the two of the most attractive assets -- 120 episodes of The Muppet Show and 86 episodes of a live-action musical program called Fraggle Rock -- won't belong to EM.TV until some time after 2050, by which time they will probably have little broadcasting value, these people said.

"It is hard to say what they will be worth (at a time) when all of us are dead," said a person with extensive knowledge of the contract.

Media industry analysts said licensing contracts usually run from one to five years, and occasionally as long as 10 years. Some high-quality cartoons can be licensed again and again over decades. "Donald Duck is an example," said DG Bank's Nicole Davion in Frankfurt. However, Ms. Davion said she has never heard of a company buying rights that don't begin until years into the future. "It could happen, but it's a risk," she said.

The price is much more than Kirch itself was willing to pay for a similar package of programs. In 1999, before EM.TV bought Henson, Kirch sought to buy the immediate German-region rights to a package of programs from Henson for a period of 10 years, people with knowledge of those talks said. The price discussed was between $8 million and $10 million; the talks stopped when EM.TV bought Henson, they said.

EM.TV's supervisory and management boards didn't learn of the contract until Kirch mentioned them in a letter sent in Dec. 28, these people said.

Frankfurt attorney Hans Christian Hauck said German law requires companies to honor contracts signed without board approval. However, if a company has rules that require supervisory board approval for certain deals, the board can try to hold the executive personally liable for such contracts, Mr. Hauck said.

The second contract stems from a dispute over Junior.TV, a library of children's TV programs owned jointly by EM.TV and Kirch. EM.TV is supposed to license Junior programs, including those previously owned by Kirch. But in 1999 Kirch licensed "Sabrina the Teenage Witch" and a handful of other programs that it said are aimed at adults and therefore don't belong to Junior, people familiar with the matter said. EM.TV objected; in the end, the companies settled by agreeing that Kirch would pay EM.TV 60 million marks, these people said.

EM.TV included that sum in its 1999 books, but when auditors reviewed its accounts at the end of the year, they found no contract to back it up, these people said. The contract finally surfaced in the second quarter of 2000, they said.

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