Management buyout of Henson appears likely. (Up Front).

A management buyout of Jim Henson Co. appears likely as troubled EM.TV & Merchandising AG decides what to do with the Hollywood-based creator of the Muppets, sources close to the company said.

EM.TV, the German children's programming producer, stands to get only about one-fifth of the more than $1 billion it paid for Henson in 2000.

While the company once considered a partial sale of Henson, it now wants to sell off the entire property and is looking to get about $200 million, according to a source close to the company. Henson lost a valuable asset when EM.TV sold off the copyrights, and gave up the corresponding royalty stream, to the Sesame Street franchise in 2000.

Allen & Co. Inc., the New York-based investment bank, was hired in May 2001 to help EM.TV decide what to do with Henson, for which many in the industry believe the firm paid too high a price. Walt Disney Co. and Viacom Inc.'s Nickelodeon reportedly have emerged as potential buyers, but Henson management last week appeared to be the front-runner, these sources said.

"It's coming down to the wire. I just don't know who's going to win," said a source close to the negotiations. "It's increasingly likely the company will be sold to management in a buyout."

Accounting problems and an expensive buying spree, which included the purchase of Henson and a majority stake in Formula One racing, left EM.TV with heavy debt and prompted its stock to plummet. German media mogul Leo Kirsch invested heavily in the failing company last year but EM.TV has continued its search for a buyer for Henson.

Henson has about 250 employees in L.A., New York and London. Its assets include a library with 650 hours of programming, merchandising rights to the Muppets and other characters, and The Jim Henson Creature Shop, which makes animatronic characters for TV and film. There are a handful of bidders interested in Henson and their offers are said to vary greatly.

Henson executives want to buy the entire company and have been "laying the foundation" for what they would do with it if they owned it, one source said.

Over the past few months, Henson has been making a major marketing push and refocusing on its classic, and best-known, Muppet characters, such as Miss Piggy and Kermit the Frog. The move coincides with the 25th anniversary of the popular puppets.

"There are a lot of under-exploited assets here at The Jim Henson Company... Unfortunately, we've never spent a dollar marketing them," said President and Chief Executive Charles Rivkin. "We're using the 25th anniversary as a launching pad for the rejuvenation of the Muppet franchise."

In the past few weeks, Henson has worked out several Muppet deals. The company established a partnership with Action Performance Companies Inc. this month to design Muppet-themed race cars, which will make their NASCAR debut on July 14, and die-cast collectible replicas of the vehicles. Jim Henson Television agreed to work on a new Muppet prime-time series for Fox Broadcasting Co., expected to air next year.

The company also is developing an original movie for NBC studios titled "It's a Wonderful Muppet Christmas" that may be out this holiday season. In addition, Henson and Columbia Tristar Home Entertainment are working on "Kermit's Swamp Years," a direct-to-video film about the early years of the Muppets.

"You're going to see Muppets everywhere. It's been a carefully orchestrated plan to bring back the classic Muppet franchise and make them more relevant to today's consumers," Rivkin said. The company has been run in a "very risk-averse manner" for a decade and only recently hired a marketing team, he added.

Rivkin's influence

Rivkin was hired by Muppets creator Jim Henson in 1988 straight out of Harvard Business School and in 1995 became the first person outside of the Henson family to become president of the company. Under his leadership, Henson has secured access to distribution for the company's properties on a worldwide basis and by launching the Kermit Channel, an international cable network.

The sale to EM.TV should have brought an infusion of cash into Henson and helped it extend its brand worldwide but the German firm fell into trouble soon after the purchase. A management change only added to the uncertainty. Former EM.TV head Thomas Hoffa, the man behind the Henson and Formula One buys, left EM.TV in July 2001 and was replaced by Werner Klatten.

"It has been a difficult two years," Rivkin said. "We were not able to operate the business as usual because of their own cash constraints in Munich."

Being up for sale has also made it difficult to plan Henson's future. Henson expects to have a positive cash flow this year and is using that money to fund its operations, he added.

While there are other interested buyers, a source said; "Everybody in this post-9-11 environment is interested in... a company that contributes to earnings the first day." But Henson will require significant investment and restructuring to once again become a family programming powerhouse.