Pro7 steels itself for bad news

Shares down 90% from last year

COLOGNE, Germany -- It's been a rough week for Thomas Ebeling, the new head of ProSiebenSat.1. And it's sure to get worse today, when Europe's second-largest broadcaster reports the news of redundancies and ad revenue declines in its full-year earnings report.

Ebeling began work Monday, the day ProSieben shareholder KKR valued its original $220 million investment in the network at zero and wrote off 20% of its subsequent $30.2 million cash injection. That news knocked another 5.7% off ProSieben's already rock-bottom share price.

ProSieben shares are down 90% from last year and its market cap is less than $180 million, ridiculously low for the operator of 27 broadcast channels in 13 countries. But the stock price is only one of ProSieben's problems.

The company is in the midst of what could be termed a civil war with its own employees over the cost-cutting decision to move flagship channel Sat.1 from Berlin to corporate headquarters outside of Munich.

Sat.1 head of entertainment programming Christoph Burge already has said he won't go, leaving Ebeling with a new post to fill. Sources said another 190 Sat.1 employees (of 225 affected) will also quit rather than move. Because of German labor laws, that could mean ProSieben will have to shell out $500,000 to buy out those workers' contracts.

Then there's the debt issue. In the first nine months of last year, ProSieben booked a net profit of about €41 million, but interest payments on its massive €3.8 billion debt ($4.3 billion) are about six times that. Further budget cuts, restructuring or asset sell-offs seem the only way out. ProSieben has denied rumors it is looking to auction off German channel 9Live, but hawking the family silver may be the best of several bad options.

ProSieben isn't helped by the fact that its shareholders -- KKR and fellow private equity group Permira -- are floundering themselves and seemingly more inclined to tap the broadcaster for cash than support their investment. Last year, KKR and Permira siphoned off more than $300 million from ProSieben in the form of a brazenly high dividend payout.

So far, ProSieben hasn't cut back on programming -- it recently re-upped its volume deal with CBS Paramount and continues to outbid competitors for big-budget film titles, paying top dollar for recent blockbusters "Quantum of Solace" and "Indiana Jones and the Kingdom of the Crystal Skull." But with ad revenue in Germany expected to fall by more than 15% this quarter by some estimates, Eberling will be hard pressed to continue the buying spree.

Given all this, it's cold comfort that in its main business -- getting people to watch its channels -- ProSiebenSat.1 is doing rather well. Last month, the group's core German networks together accounted for a 28.8% share of the key 14-49 demographic, up 0.3% on January.

Sadly for ProSieben and its new boss, that isn't a figure you can take to the bank.
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