International Business: Europe
Murdoch: Invading Europe?
A deal with Canal Plus would create a superplayer
Rupert Murdoch's talks with French pay-TV giant Canal Plus about a merger or joint venture have the European media industry buzzing. Murdoch is the most closely watched and feared of moguls, and Europe's media industry is far more fragmented than that of the U.S. Perhaps, industry analysts and executives are thinking, Murdoch will manage to kick off the European media consolidation that seems logical but devilishly tricky to do. "Impossible does not exist for Murdoch," says Jerome Seydoux, chairman of the big French film and video distributor Pathe.
Murdoch desperately wants to extend his reach to the Continent. After building British Sky Broadcasting Group PLC, which he controls through a 40% stake, into the dominant player in British pay television, he sees the next media bonanza taking shape across the English Channel. The rise of digital television on the Continent offers new revenue streams through pay-per-view, which Sky is promoting to boxing and soccer fans at home. A $7.6 billion industry in Europe, pay television is growing at double-digit rates, ranging from 10% to 15% a year. Moreover, rapid advances in technology could soon turn pay-television networks into home-shopping and Internet-access vehicles.
A linkup between BSkyB and Canal Plus would create a powerhouse overnight. The combined company would have dominant pay-TV positions not only in Britain and France but in Spain, Portugal, the Netherlands, and Italy. Edouard Tetreau, media analyst at Credit Lyonnais Securities in Paris, estimates that the combination would have 75% of the European pay market. Working together, the companies would have far greater power with Hollywood over TV and film rights. Any proposed merger, however, would draw the scrutiny of Europe's competition commissioner, Karel Van Miert.EGO CLASH? Management conflicts are another obstacle to a BSkyB-Canal Plus tie-up. BSkyB's management, led by U.S. media veteran Mark Booth and Murdoch's daughter, Elisabeth, is nothing if not self-assured, and Canal Plus CEO Pierre Lescure is also long on self-confidence. After a meeting between Murdoch and Lescure on Mar. 3, Canal Plus announced that it "must have a dominant position in the management of the potential alliance." Canal Plus has 11.6 million subscribers, vs. BSkyB's 7 million. But BSkyB is unlikely to concede control: Its market cap of $14 billion outpaces Canal Plus's $9.1 billion.
With all the obstacles, Murdoch and Lescure may do a deal that falls well short of a full merger. The two companies might cooperate elsewhere in Europe but pledge to stay out of each others' home markets. Canal Plus may sell BSkyB stakes in its TV ventures outside France. Or BSkyB and Canal Plus could share the interactive system that BSkyB is now developing with British Telecommunications PLC. Such an arrangement would make sense when both companies are spending huge sums on expansion.
Big expenditures are hurting earnings at both companies. Analysts expect Canal Plus to report that losses topped $100 million in 1998, on revenues of $2.7 billion. BSkyB has been hugely profitable in recent years. But in the last quarter of 1998, BSkyB's pretax profits dropped 59%, to $84 million. Rebecca Winnington-Ingram, analyst at Morgan Stanley Dean Witter in London, forecasts that for the year ending June 30, BSkyB will have operating profits of $389 million on revenues of $2.45 billion.
Murdoch faces a tough series of negotiations. If he wants to expand on the Continent, he might have to bow to some of Lescure's conditions. In recent years, he has tried unsuccessfully to cut deals with just about every major European player, from Germany's Leo Kirch to Italy's Silvio Berlusconi. In the U.S., Murdoch has never managed to be anything but a small player in pay TV. To fulfill his Continental ambitions, a linkup with Canal Plus may be Rupert's last chance.By Stanley Reed in London and Inka Resch in Paris, with Jack Ewing in FrankfurtReturn to top