Trilateral agreement for European TV hegemony.

Rupert Murdoch is about to add mainland Europe to his global media empire. Despite frequent setbacks, he's not willing to give up Italy and Germany, the gatekeepers of the region. Now, after months of negotiating, he's got a foot in the door.

The key figure in Murdoch's attempt to enter the European continent is German media mogul Leo Kirch. Kirch's media company, the Munich-based Kirch Group, has had to deal with significant losses since the launch of the subscriber-impaired digital pay-TV platform DF-1 two years ago and since the European Commission prohibited an alliance with Bertelsmann, another major player in Germany. Desperate for an injection of capital, Kirch has finally opened his company to foreign investors.

The plan (code-named Operation Traviata) is to build up a new European media company that will specialize in the production and distribution of movies and TV programs. At press time, the new company was scheduled to launch in September. According to Fedele Confalonieri, the president of Italian TV company Mediaset, "the core" of this new enterprise will be Kirch and media magnate and former prime minister of Italy Silvio Berlusconi, who controls Mediaset. Confalonieri also said in an interview with the Italian magazine Il Mondo that there is an opening for Rupert Murdoch to join the project. Murdoch, Berlusconi and Saudi Arabian prince Al Waleed Bin Talal are reportedly set to acquire roughly 20 percent of the Kirch Group for an estimated $1.5 billion as the Kirch Group goes public on the Frankfurt stock exchange.

For Murdoch, this would be the happy ending of a long battle. In the spring of 1998, the Australian media magnate with the American passport headed off to Germany, hoping to finally conquer Europe's biggest media market (which generated advertising revenues of $4.4 billion last year). For years Murdoch has been wrestling with the two major players in the German media business, Bertelsmann and the Kirch Group, trying to acquire stakes in their TV channels. Before the recent turn of events, he had only succeeded in acquiring a 49.9 percent share in the small commercial channel Vox.

However, now that he is about to set foot in Germany, Murdoch may find Italy within his reach. He failed in his attempt to buy a major stake in Mediaset in March, but he is now seeking to enter the market via the digital TV platform that Telecom Italia and state television company RAI are planning to build.

Europe has traditionally been a tough place for foreign media corporations interested in branching out. In Germany, the highly regulated media landscape scared most potential foreign investors off. Both the German and Italian political elites are widely accused of a lack of international vision. Last year, however, German authorities loosened the country's stringent regulations considerably, rendering Germany much more attractive. Also encouraging for foreign investors was the European Commissions decision to block Kirch and Bertelsmann in their joint effort to develop digital pay-TV in Germany.

At the annual Media Forum in Cologne in June, Murdoch announced plans to increase his stake in Vox. Murdoch hopes to buy the 24.9 percent interest in Vox belonging to French pay-TV group Canal Plus, which is finally willing to give up its share in the channel. However, Bertelsmann, which also holds 24.9 percent of Vox, has the prior option of purchase on the Canal Plus shares. Murdoch wants to make Vox, which currently reaches only about five percent of the German audience, into an American-style cable channel heavy on self-produced local shows.

As always, Murdoch is working on several fronts at once. During his visit to Cologne, he was keen to meet Wolfgang Clement, the prime minister of the German state of North Rhine-Westphalia. Clement is a close friend of Gerhard Schroeder, who at press time was expected to become the German Tony Blair in the national elections in September.

And the near-collapse of the Kirch media empire comes at the right time for Murdoch, who stands ready to offer up his cash. According to a report in The Wall Street Journal the Murdoch-Kirch deal is valued at between $600 million and $650 million. The companies are said to be ironing out their differences over the value of the assets, a subject on which the negotiators are reportedly disagreeing wildly. Kirch owns stakes in several TV networks, including the free TV channels Sat 1, Kabel 1, Pro Sieben and Deutsches Sportfernsehen, and it also possesses Europe's largest film library.

In the meantime, Murdoch is negotiating with Italy's Telecom Italia to acquire a stake in its company Stream, which is planning to build a new digital TV platform with RAI. This digital platform is intended to be a competitor to D+, Canal Plus' Italian digital operation, since talks of building a common platform failed. If the deal with Murdoch goes through, Telecom Italia will own 51 percent of the new digital platform, Murdoch will own an estimated 30 percent to 40 percent and RAI will own the remaining percentage. Murdoch will conduct the Stream deal through his British TV enterprise BSkyB. The negotiations, which are reportedly at an advanced stage, are apparently hampered only by a debate about Murdochs position in the management of Stream. However, at press time both parties were eager that a deal be reached by mid-August, since they hoped to jointly bid a great deal of money for the TV rights to Italy's Premier League Soccer championships from 1999 to 2005.

Perhaps Murdoch has seen the end of his failures in Italy. Most recently, there was the rejection of his attempt to buy a share in Mediaset in March. The Italian government had been urging Silvio Berlusconi, who controls 50.6 percent of the company, to divest partially or fully from Mediaset in order to resolve the conflict of interest created by his dual roles as a politician and as the owner of Italy's three biggest terrestrial commercial TV networks (which together generate half of the country's TV ad revenue). Mediaset also owns a TV production outfit and a large program fights library. The deal with Murdoch was blocked primarily by Berlusconi's daughter, Marina Berlusconi, who is deputy chairman of her father's company Fininvest. "We are no longer part of a Murdoch-style takeover," she said in a TV interview quoted in the London-based Daily Telegraph. "Instead, the group is planning its own expansion. We are ready to make acquisitions in Italy and abroad."

But if Murdoch succeeds in joining the Kirch-Silvio Berlusconi alliance, Marina Berlusconi will have to make other plans.

RELATED ARTICLE: Leo Kirch's Financial Picture

In 1996 the revenues of the Kirch Group were reportedly $790 million, while its expenses were reportedly $963 million. According to several accounts, Kirch had used $460 million of its cash reserves by 1996 and had used $588 million by 1997. Kirch now owes some 10 banks more than $1.7 billion; 35 percent of this sum is owed to the Berliner Bank. These loans generate passive interest of $113 million each year. In September of the year 2000, Kirch will have to repay more than $1.3 billion.

In any case, it is speculated that Kirch Group boss Leo Kirch will sell 20 percent of his media empire for as much as $2 billion, after which his companies will be restructured around a foundation, in a setup similar to that of Bertelsmann.