As expected, BSkyB last week secured its interest in Leo Kirch’s Premiere World pay-TV platform in Germany, taking a 24 per cent stake in KirchPayTV GmbH. The deal is subject to regulatory approval. In return Kirch gets 4.3 per cent of BSkyB, with Kirch Group vice chairman Dieter Hahn joining the BSkyB board on completion. It was also confirmed that KirchPayTV would seek to launch an IPO during 2003. BSkyB gets two seats on the KirchPayTV six-person supervisory board.

Not everyone thinks the deal is good news. Investment analysts at Morgan Stanley Dean Witter lowered their rating on BSkyB stock from outperform to neutral as a result of the announcement, describing the German pay-TV market as "an uphill struggle".

While Morgan Stanley admitted that Germany was "a huge underdeveloped market" for pay-TV, with 33 million TV homes compared with the UK’s 22 million, the analysts argued that "it is also important to understand why penetration is so low" at 6 per cent. The analysts point to the historical strength of the free-to-air sector and the high level of free-to-air cable and satellite penetration. However, against this must be set the fact that Germany stands alone in Europe in having only one pay-TV platform, avoiding confusion amongst consumers. In addition, Premiere World has direct access to all its subscribers, crucially including those who access the service via cable. Thus the service’s margin on cable customers is not very different to that it gets from satellite. Future opportunities include a chance for the platform to gain a stranglehold on Bundesliga football rights. At the end of the current season, the wage cap on Bundesliga salaries will be lifted, giving rise to the likelihood that clubs will seek additional TV revenues to be able to afford the top players. News Corp is also likely to move its Champions League rights from its free to air ‘women’s interest’ channel TM3 to Premiere World. Even given a scenario where the relatively successful relaunch leads to three million subs by the end of 2000, Morgan Stanley forecasts that Premiere World will not achieve EBITDA breakeven until 2002/3 at least. Net income is only likely to be positive by 2005/6.

"To sum up on BSkyB’s purchase of a stake in Premiere – we can see the long-term potential, but we believe that there are significant risks, namely the programme offering, pricing, additional marketing spend and the high level of debt," said Morgan Stanley’s report.

This is the second attempt by BSkyB to involve itself in Kirch’s activities, the first failed to get off the ground in March 1997.

BSkyB is investing DM1 billion in cash in KirchPayTV to be funded by the issue of new BSkyB shares, with News Corp and Vivendi taking up their allocation in full in order to maintain their current percentage shareholdings. Kirch then gets 78 million in new shares, which at December 3 stood at Pounds 7.97 a share, representing 4.3 per cent of the enlarged share capital, worth Pounds 622 million.

As at October 6 KirchPayTV had some two million subscribers, split between cable and DTH. Premiere World says it has sold 200,000 new subscribers in its first two months of operation. Operational break-even is expected at 11 per cent penetration or some four million homes.

Besides its Premiere World operation, KirchPayTV also has a 40 per cent ownership interest in Teleclub AG, operating in Switzerland.

In a statement BSkyB says it did not expect "any synergies in conditional access technology or sports and movie programming rights to arise from the transaction" which seems to rule out, at least in the immediate future, any switch to NDS encryption or joint-venture activity over sports rights, one of Kirch’s strong points. However BSkyB owns the German rights to the English soccer Premiership and it is likely that Premiere World will benefit from these showings.