Media watchdog bites

What looked like a done deal at a tidy multiple for US media baron Haim Saban and his private equity co-investors is in danger of falling apart. On January 10, Germany's media regulator KEK blocked the agreed €2.5 billion ($3 billion) sale of Saban-owned ProSiebenSat.1 to Axel Springer Verlag on the grounds that the tieup would create a media conglomerate with excessive influence over German public opinion.

KEK's intervention came after another regulatory body, the Federal Cartel Office, had already warned that it wouldn't like to see the integration of ProSiebenSat.1 into Springer. With a market share of 22 percent, ProSiebenSat.1 is Germany's largest broadcaster in terms of advertising revenue; Springer on the other hand is the country's dominant newspaper publisher with 26 percent of the market.

Forced to come up with a quick response in order to salvage the purchase, Springer has started to look for a buyer of ProSieben, one of ProSiebenSat.1's two largest TV channels. Selling the division, which would leave Springer with Sat.1, would be the kind of largescale concession to the regulators that the newspaper group had previously been resisting.

Finding an alternative home for ProSieben should not be difficult: rivals Television Francaise 1 SA, private equity-owned SBS Broadcasting and Premiere, the German pay TV operator formerly owned by Permira, have all signalled interest. But Springer would enter any talks as a forced seller, which isn't the best position from which to secure a decent price. In addition, the regulator says the ProSieben disposal must get done before Springer can complete its acquisition of the company's remaining assets – meaning the deal with Saban will have to be renegotiated also.

Costly delays therefore appear inevitable: Saban, who acquired ProSiebenSat.1 in 2003 along with financial investors Hellman & Friedman, Alpine Equity Partners, Bain Capital, Providence Equity Partners, Putnam Investments, Quadrangle Group and TH Lee for €523 million, is entitled to €25 million in compensation from Springer for every month that completion will be put back.

Given these complications, an alternative outcome would be for Springer to pull out of the deal altogether. The company has already said that it sees other options, such as acquisitions in digital media and abroad if ProSiebenSat.1 does slip away.

Saban, meanwhile, is reportedly eager to achieve a full exit as quickly as possible. If an alternative partner emerges, one that wouldn't worry the authorities, he may be tempted to grab it with both hands – leaving Springer to pursue opportunities elsewhere.

EU preps commission on private equity
The European Union is preparing to form a special commission to form policy on the European private equity and hedge fund industries, according to Carol Kennedy, a senior partner at London-based fund of funds firm Pantheon Ventures. Kennedy's comments came near the beginning of the 2006 North American Private Equity COOs and CFOs Forum held last month in New York and organized by Private Equity Manager. Kennedy said it was crucial that the private equity industry present itself as one that benefits from ?strong self-regulation,? or the EU commission may seek to impose regulations. Kennedy noted that regulations passed down from the EU would likely convince regulators at the Securities and Exchange Commission in the US that private equity needs a closer look.

SEC studies hedge fund merger tactic
The Securities and Exchange Commission is considering an enforcement action against a hedge fund that uses a complicated tactic whereby voting rights are acquired without capital being placed at risk. As reported in the Wall Street Journal, New York hedge fund Perry Capital last month sent a letter to investors saying the SECmay take action against it related to a trading position it took in a failed merger between Mylan Laboratories and King Pharmaceuticals. Perry had a position in Mylan and when King offered to acquire the company for $4 billion in mid-2004, the hedge fund bought additional shares in order to win rights to vote in favor of the deal. But the firm entered into a complex short position related to its increased stake. The deal later fell apart, and the SECis investigating whether to bring fraud charges against Perry, accusing the fund of not disclosing pertinent information related to its holdings.

OCC dashes banking hopes on real estate
The US Office of the Comptroller of the Currency issued an unusual statement in January swatting

down the notion that banks will be able to broaden their real estate investment activities. The announcement followed a series of articles in the press that stated the OCC, a division of the Treasury Department that regulates banks, had approved two hotel development deals proposed by PNC Financial Services and Bank of America, respectively. Banks are currently banned from investing in real estate other than to house bank employees. The approved projects are largely intended to provide rooms for traveling bank employees, but some analysts saw it as a relaxing of OCC strictures against bank-backed real estate development. The OCC statement, from Comptroller of the Currency John Dugan, read: ?I want to set the record straight. These letters [to the banks] were not intended to expand, and do not expand, the authority of national banks to hold real estate.?

IRS clarifies on foreign dividends
The Internal Revenue Service has extended simplified procedures for determining whether foreign dividends qualify for the reduced tax rate applied to qualified dividends, according to a client memo from law firm Goodwin Procter. The procedures are related to the Jobs and Growth Tax Relief Reconciliation Act of 2003, which reduced qualified dividend tax to a maximum of 15 percent for individual taxpayers. However, the dividends from certain foreign investment companies are not deemed ?qualified dividends? by the IRS. Notices 2003-2 and 2004-71 provide a simplified procedure for determining which dividends qualify for the 15 percent tax rate. The IRS has now extended through 2005 and future years these procedures, according to Goodwin Procter. Generally, dividends paid by a foreign corporation are qualified if the corporation trades in the US; if the corporation is incorporated in a possession of the US; or if the corporation benefits from certain comprehensive tax treaties, according to the memo.