‘EM.TV was always a high flyer.’ Thus begins spokesman Michael Birnbaum’s explanation of the extraordinary saga EM.TV & Merchandising has undergone during the past 12 months: The company has both climbed to unbelievable heights, with the acquisition of The Jim Henson Company and a 50% stake in the Formula One racing organization, and seen desperate lows-with its stock losing 90% of its value over 10 months, an earnings forecast slashed from US$238 million to US$22 million in early December, the resignation of chief financial officer Florian Haffa and lawsuits brought against the company by various investor groups, including the DSW German shareholders association.

Despite an encouraging 18.5% pre-Christmas stock jump, EM’s not out of hot water yet. The company needs to raise some cash-fast. Not only to make good on the Jim Henson and Formula One deals (financing for both is partially based on the value of EM’s stock), but to prepare for the acquisition of 25% more of the Formula One franchise, an acquisition that the company will be legally obligated to make if the call option written into the original contract becomes a put option later this year. Meanwhile, EM has the expenses of integrating the Jim Henson Company and can’t expect any income from merchandising Formula One until the second part of the deal is complete.

EM probably can’t afford to do this on its own-thus the announced partnership with German conglom KirchGroup. But the Munich-based company may have jumped the gun when it announced that it ‘secured its future’ with the deal, because the deal itself isn’t a sure thing yet.

‘Kirch is a strategic partner with Junior, and they’re one of the big outlets in Germany, so they’re heavily interested in Formula One,’ says Birnbaum. ‘Nevertheless, I must stress that it’s a non-binding deal memo. If it’s not in the best interests of our shareholders, then we won’t close the deal.’ Kirch, too, can pull out at any time.

As it stands, there are actually two deals outlined in the memo. One is a cashless exchange in which EM.TV gets sole control of the Junior programming portfolio, while Kirch gets a 16.74% stake in EM.TV. The other deal is Kirch’s outright purchase of 49% of EM’s 50% interest in SLEC (the holding group controlling the Formula One franchise) for US$550 million. However it turns out, at press time, Birnbaum said he doesn’t expect the tentative deal to be finalized until at least mid-February.

In the meantime, EM.TV has found another source of quick cash in The Jim Henson Company. Until now, Muppets designed and operated by Henson for Sesame Workshop’s Sesame Street were jointly owned by the two companies. Sesame took the lead in merchandising the characters, says Henson president and CEO Charles Rivkin, and paid Henson an annual ‘royalty’ fee for the privilege. Rivkin says the ownership of these characters was a byzantine affair, with Henson having the right to refuse certain initiatives, but not able to proactively exploit the characters. Not only that, but Henson was a familiar and fairly agreeable partner, and Sesame Workshop was nervous that it now jointly owned characters with a German merchandising company.

Sesame and EM worked out a deal in which Sesame gets all rights to all of the Muppets that appear on Sesame Street (except Kermit, who stays with Henson), while EM gets to rep the Sesame Street property merch-wise throughout Europe. (Previously, EM only had rights in German-speaking territories.) It has also been reported and confirmed by sources that Sesame Workshop paid EM an additional US$180 million in cash for the rights to its characters, and that Sesame will still pay a reduced royalty fee to Henson should revenue from the affected characters exceed certain levels. An agreement to shift control of cable net Noggin completely to Sesame and co-produce two series a year for the next five years rounds out the deal. Rivkin says that while some of these new projects will undoubtedly involve Muppets, others may be European-produced animation for kids.

This series of events has been followed with great interest by global children’s entertainment companies around the world, but TV-Loonland, another Munich-based company that used soaring stock on the Neuer exchange to finance rapid growth through acquisition, arguably has the most at stake.

‘The difficulties that EM.TV has been having have affected the whole media sector on the Neuer market,’ says John Bullivant, director of programs at Loonland. ‘I don’t think there’s any company that has not had its share price reduced, and therefore had its market capitalization brought down.’ Bullivant says that for now, Loonland will sit tight and occupy itself with consolidating recent acquisitions such as Sony Wonder/Sunbow, Salsa Distribution, FamilyHarbour.de and most recently a controlling interest in Seoul, Korea-based Saerom Distribution. As it’s not a good time to be borrowing money for further acquisitions, Loonland’s expansionist run is on hold for now, but it may resume some time in the future when things have quieted down.

Mainly, Bullivant is concerned about reassuring financial investors that Loonland is in a stable position financially, with no major debts and almost US$30 million in the bank. ‘Given that people are keen to generalize that all companies on the Neuer market are hugely over-capitalized and there’s no substance to their promises,’ Bullivant says, ‘we don’t want to be tarred with the same brush.’

David Ferguson, president of London-based Cinar Europe, has also been watching EM’s saga closely. ‘It really is a shame, because of the

ripples throughout our business and throughout the Neuer market,’ he says. ‘It’s not EM that brought it down, the market was already sliding. However, investors tend to make generalizations: Media is media.’ Ferguson notes that many children’s entertainment companies have ongoing production partnerships with Kirch, EM or Henson, and thus have an interest in seeing EM get back on its feet.

In the end, though, leaders in the international kid market see EM’s troubles as a minor setback to the long-term trends of globalization, increased stock market capitalization, mergers and acquisitions. The big companies are still going to get bigger and more diversified, they say, and investors will still put up great sums hoping to cash in on kids.

‘I think at the end of the day, companies will be valued more on the quality of the properties they have,’ says London-based HIT Entertainment’s managing director of worldwide distribution, Charlie Caminada. ‘I think if you are consistent, and you have a strong pipeline of shows, then you can be successful. You’ve got to be very focused on fewer, but better projects. If you try to spread yourself too thin, there will be failures, and when there are failures, naturally the market is going to be unforgiving.’