Pro7 experiencing growing pains in third quarter

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COLOGNE, Germany -- Weighed down by the cost of acquiring SBS Broadcasting and a one-off fine of 120 million euros ($177.1 million) for violating competition laws in its German advertising division, pan-European broadcaster ProSiebenSat.1 (Pro7Sat.1) booked a net loss of 78 million euros ($115.2 million) in the third quarter of 2007.

This compares with a 13.1 million euro net profit over the same period last year, when Pro7Sat.1 operated solely in Europe's German-language territories.

The 3.3 billion euro ($4.9 billion) acquisition of SBS in July greatly expanded the company's reach. Pro7Sat.1 now operates 24 free TV and 24 pay TV channels in 13 territories across Europe.

As would be expected, adding the SBS channels boosted revenue at Pro7Sat.1, which jumped 55% in the third quarter to 668 million euros ($987 million). The company also got a sales boost from the recent acquisitions of Austrian commercial channel Plus TV and online group Magic Internet, which operates German YouTube clone MyVideo.

Profits, however, were slashed by a 120 million euro ($177.3 million) fine against ad sales subsidiary SevenOne International. The German Cartel office ruled that so-called share of advertising deals between SevenOne and booking agencies were anti-competitive. Pro7Sat.1 rival RTL also was fined. Pro7Sat.1 has since adjusted its ad sales model to accommodate the Cartel office.

While growth in the core German market was flat -- Pro7Sat.1's family of German channels earned 378 million euros ($558.5 million) in the third quarter, the same as a year earlier -- SBS channels made up for that.

Sales at the SBS networks, now grouped under the company's new Free TV International division, were up 10.6% to 157.3 million euros ($232.4 million). Growth was strongest in Norway (up 18.4%), the Netherlands (+13.4%) and in Central and Eastern European territories (+13%).

"Positioning the ProSiebenSat.1 Group internationally by acquiring the SBS Broadcasting Group was the right strategic decision," Pro7Sat.1 CEO Guillaume de Posch said. "The dynamics of other European markets more than made up for the subdued German market in the third quarter. As a pan-European television group, ProSiebenSat.1 stands on a broader base and is better protected against downturns. The vigor of the other European markets will continue to drive our growth in the fourth quarter."

That growth will come largely from SBS. The German economy is slowing, though not as badly as some had predicted, following the crisis in the U.S. mortgage market. De Posch also has ruled out any major acquisitions until SBS and the German business of Pro7Sat.1 are fully integrated, an operation that could take a year and a half to complete.

Future takeovers also will be hampered by Pro7Sat.1's debt burden. As a result of the SBS buy, Pro7Sat.1 is carrying 3.5 billion euros ($5.2 billion) in debt -- compared with 312 million euros a year earlier.

A move that could trim that figure would be the sale of Pro7Sat.1's in-house production division, which employs about 1,000 people. De Posch expects a decision on a sale within the next two months.

Several players are believed to be circling the production group, including Thomson of France, German electronics group Siemens and a consortium made up of U.K. production company Red Bee Media and IBM.

Shares in Pro7Sat.1 were up 5% in late-afternoon trading to 17.80 euros ($26.3).
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