German TV biz sees days of the locusts.

German vice chancellor Franz Muntefering, a Social Democrat, recently labeled large investment companies "locusts," and since then, the moniker has stuck. The nickname stems from the fact that locusts descend upon a territory and leave everything destroyed. Similarly--at least according to critical left-wing Germans--investors buy into a company, squeeze every penny out of it and sell the useless shell.

These days, the "locusts" have come in the form of Lavena Holding 4, a conglomerate of U.K.-based Permira and U.S.-based Kohlberg Kravis Roberts (KKR), which acquired the majority ownership of German commercial TV group ProsiebenSat. 1 Media AG, which subsequently bought--from its own investors--European Broadcasting conglomerate SBS Broadcasting. Private equity funds KKR and Permira purchased SBS only two years earlier before selling it to the ProSieben Group (for a hefty profit), forging a strong new European TV player.

The deal stirred up recent memories of ProSieben's former owner, the Kirch Group, which financed its expansion by going into a debt that later killed the entire venture. To finance the SBS purchase (costing approximately 3.3 billion euro), ProSieben--which was almost debt-free until recently--has relied on bank loans and now finds itself loaded with debt. Depending on the perspective, ProSieben is either extremely lucky or unlucky to have finalized the deal just in the nick of time, before the so-called "credit crunch" sent waves through the U.S. and the rest of the world, making loan financing a lot harder.

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ProSieben CEO Guillaume de Posch's aim is an ambiguous one. On one hand, his goals are set on expansion--setting up a pan-European TV player out of two individual players (SBS and ProSieben) that will be able to compete with the still much larger RTL German group. On the other hand, de Posch has announced plans to increase his group's profit margins from 20 percent to some 25-to-30 percent, despite the high cost of investment. Growth is expected to take place particularly in Eastern Europe, where SBS is already quite strong and where the company has expanded into radio ventures.

But some analysts predict that problems might arise from merging the ProSieben and SBS ventures. ProSieben's core business so far has been strictly TV--free TV, to be precise. Two small basic pay channels were launched only recently in an effort to become less dependent on classic advertising revenues. The company's main ventures are still the two large German general interest channels ProSieben and Sat. 1, along with Kabel 1--a general entertainment channel generating about half the audience of each of the major channels. There is also N24, a news channel, and 9Live, which features interactive game shows. The entire group has brought in about double the revenue of SBS, which in 2006, for the first time, crossed the one billion euro benchmark.

SBS operates free-to-air TV and radio channels in Benelux, Scandinavia and Eastern Europe. After acquiring the Nordic Canal+ pay platforms, the company has also become a major payTV player in Scandinavia. In the Netherlands, the company also runs the two major printed TV guides.

Despite the skepticism running rampant in the industry, de Posch plans to quickly integrate the SBS ventures into his group. By this fall, the old SBS headquarters in Amsterdam may be shut down. De Posch expects synergies to come primarily from joint program acquisitions, where lower prices can be negotiated. SevenOne International, the division of ProSieben that sells productions and formats internationally, may profit from the larger group's activities as well. But analysts say the profits are not enough to bring down the group's mounting debt. So the channels will likely face increasing pressure to cut costs, at least according to one senior analyst at a large German bank (who said this shortly before the first severe job cuts at the Sat. 1 network became public).

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As per the announcement, approximately 200 jobs will be lost, 40 of which are being attributed to administrative roles that will become redundant once ProSieben and SBS are forged together. Another 180 employees of Sat. 1 will lose their jobs as a result of daily magazine formats being taken out of program schedules. Sat.1 managing director Mathias Alberti has vehemently denied that the changes in programming are results of the TV group's new owners. Nevertheless, the reaction from media regulators and the public in Germany has been harsh. Local Rheinland-Pfalz regulator LMK, which granted Sat. 1 its license, launched a rather short-lived investigation into whether or not the channel still meets its licence terms since, in order to be eligible for analog cable distribution in Germany, channels have to prove that they cover all genres, including news and information.

Even though it was fleeting, the regulators' move illustrates just how sensitive the German authorities and public are when faced with so-called "locusts." Other local media regulators are starting to investigate the influence investors have in the German media industry. They've already suggested implementing a limit to the number of shares investors can acquire in various industries, including the media. It remains to be seen whether this will pan out. Bernhard Heitzer, president of the German antitrust watchdog Bundeskartellamt, has already voiced opposition to the idea.

In the meantime, analysts are eagerly anticipating Permira and KKR's next step. ProSieben has said that in order to reduce debt, the companies may consider selling production company ProsienbenSat. 1 Produktion, which has 1,000 employees. Permira is also the owner of the England-based production conglomerate All3Media that only this May acquired the major German independent production house MME. If all this is merged into one big group, another major pan-European player would be formed. For now, it's all mostly speculation. And while the idea has charmed some Wall Street-types, for German critics, politicians and regulators alike, it might be a whole different story.