Finance woes, defection could put Cyfra+ in a corner

"I think ultimately (Cyfra+) will have to withdraw from the market," said Georg Hotar, an analyst following Poland for ICE Securities in London. "Linking with Wizja is one of the options it may consider."
The reported decision of private television station Polsat to jump from Cyfra+ to @Entertainment-owned Wizja could give added impetus to Canal+, which is behind Cyfra+, to either pull the plug on the digital platform or more likely to intensify ongoing talks with @Entertainment about a possible merger of the competing broadcasting systems.
Neither @Entertainment nor Polsat would comment on whether the private television operator is about to make a move.
But senior executives at both companies, who did not wish to be named, confirmed to the Business Journal last week that a deal for Polsat to switch is in the offing. "I expect the talks to be finalized within 30 days," said one executive involved in the negotiations.
Polsat is re-examining its options in the wake of a decision last month by the National Radio and Television Council (KRRiTV) allowing it to split its satellite channel Polsat 2 into six thematic channels.
With an estimated launch cost of about $2 million for each of the channels, Polsat is looking for a stronger financial partner who would participate in the creation of its new package, a source close to the station said.
If Polsat teamed up with Wizja, its six new channels would expand the digital platform's current offering of 19 channels. "Wizja can offer not only money but also distribution," the source said.
In addition to Wizja, @Entertainment also owns and operates the country's largest cable network, Polska Telewizja Kablowa, with more than 935,000 subscribers at the end of last year.
Polsat's programming has reportedly been absent from Cyfra's platform for the past few weeks, but Lew Rywin, president of Canal+ Polska, recently said this was due to technical problems with a satellite transponder.
A Polsat defection is only one problem facing Cyfra+, however.
Cyfra+'s owner, Telewizyjna Korporacja Partycypacyjna (TKP), is in a financial bind. It is trying to meet an end-of-the-month deadline to re-negotiate a DM 129.4 million credit facility with Banque Paribas and Societe Generale whose terms it has breached. Currently the company cannot draw down more funds from the facility, which has DM 100 million outstanding.
At the same time, Agora, which owns 20% of TKP and has written off the value of its share, has said it would not inject any more capital into the company. It is not clear how much cash Canal+, which owns 33% of the company, will be willing to pony up to lead losses as the platform develops. The Canal+ Group last week reported an ECU 28.2 million loss for 1998.
"There is a lot of pressure building up around Canal+," Hotar said. "It needs to find a solution, and that will have to happen pretty quickly."
The remainder of the company is owned by private concern Polcom Invest, but it is not known if this company has the means or willingness to finance Cyfra.
TKP will soon need new money. Industry sources said the company was planning to lease a new transponder next month at an estimated cost of ECU 4 million for a year.
While TKP would not disclose its financial results, the company reported a zl. 132.8 million ($34.9 million) loss to the end of September 1998, according to the initial public offering prospectus for Agora.
In addition, while Cyfra has reported 87,000 D-DTH (digital-direct-to-home) boxes sold for Cyfra+, sources within the company said only a fifth of these were to new subscribers. The remainder went to existing Canal+ analog subscribers who did not have to pay to switch to the new system.
As a result, Cyfra+ has been cannibalizing Canal+'s existing analog network, Hotar said.
The poorer-than-expected subscription figures of the station's analog operations were one of the reasons why it found itself in breach of the credit facility agreement, Agora's IPO prospectus said.
These troubles may well leave @Entertainment in the catbird's seat.
"Canal+ either already has or will run out of financing in a short time," ICE's Hotar said. "At the same time Wizja is fully financed."
Although the Cyfra+ platform is to be operated by a number of Polish media players, as the consortium has yet not been registered, Canal+ remains the only party that finances Cyfra+.
"With no money at stake in Cyfra+, Polsat could do a U-turn and turn to Wizja," commented Hotar. "And from Wizja's point of view it obviously makes sense to lure Polsat from Cyfra."
Bob Fowler, @Entertainment's chief executive officer, late last week confirmed that the company was seriously talking to third parties, but refused to disclose the names.
"We've been having on and off discussions with Canal+ as well as other partners," he said last Friday. "But there are still many issues to be resolved and it's too early to say whether the dialogue will be productive."
If a deal was to come off, it would likely bring much-needed cheer to @Entertainment shareholders. The company's stock has languished below $10 for months. Last April, when @Entertainment and Canal+ signed a tentative agreement to create a combined digital platform, the U.S. companies shares jumped to $19, not far off its IPO price of $21. However, when that agreement fell through @Entertainment's shares dropped sharply.
Cyfra's demise could bring the share price back to highs not seen since a year ago, analysts said.
"Investors are waiting for something to happen," Hotar said. In recent reports by both ICE Securities and Merrill Lynch, the investment houses both gave the stock "buy" recommendations and cited price objectives of $17 per share.
The Nasdaq-listed stock closed at $9.44 last Thursday, 3.5% up on the week.