Rupert Murdoch is pursuing a deal that would transform British Sky Broadcasting Group Plc (BSY) into a European satellite-TV giant while also leaving his U.S.-based 21st Century Fox Inc. (FOX) focused on entertainment programming.
BSkyB, 39 percent owned by Fox, said today it’s in talks to buy the Italian and German pay-TV assets of Fox. Such a deal, for control of satellite carriers Sky Italia and Sky Deutschland AG (SKYD), would be valued at about 10 billion euros ($14 billion), people with knowledge of the matter told Bloomberg News, which reported the talks on May 9. Fox has about 57 percent of Sky Deutschland and 100 percent of Sky Italia.
A deal would give BSkyB, already the biggest pay-TV provider in the U.K., oversight of companies that sell satellite programming to 8.5 million homes across Germany and Italy. By shedding the pay-TV units, Fox would be left with cable and broadcast networks plus movie and TV studios, making it more attractive to investors who want to bet solely on video production -- not distribution.
“This combination would have the potential to create a world-class multinational pay-TV group,” Isleworth, England-based BSkyB said in a statement.
Sky Deutschland shares jumped 9.9 percent to 6.97 euros, the biggest gain since April 2012. The stock had fallen 21 percent this year through May 9. BSkyB fell 2.4 percent to 868.5 pence in London, giving the company a market value of 13.6 billion pounds ($23 billion).
Fox shares rose 3 percent to $35.19, the highest price in four months.
The talks haven’t progressed beyond a preliminary stage, no agreement has been reached on terms, value or transaction structure and there is no certainty that a deal will occur, BSkyB said.
“Over the years we’ve had numerous internal discussions regarding the organizational and ownership structure of the European Sky-branded satellite platforms,” New York-based Fox said in a separate statement. “From time to time these conversations have included BSkyB, however no agreement between the parties has ever been reached.”
BSkyB said it initiated the discussions with Fox. The companies have been in talks for months, and a deal could be announced this summer, said the people familiar with the matter.
While it remains unclear whether and how a transaction would change Fox’s 39 percent holding in BSkyB, any attempt to increase it would likely require regulatory approval. Fox was forced to abandon its pursuit of full ownership of the company in 2011 amid political opposition after allegations that journalists at U.K. newspapers Murdoch controlled had hacked into celebrities’ phones and bribed police.
A transaction could be valued at 10 billion euros, the people said. Fox’s Sky Deutschland stake of 57 percent was valued at about 3.2 billion euros before the market opened today, giving the entire German unit a listed valuation of 5.6 billion euros. The Sky Italia holding could be valued at about 5 billion euros, the people familiar with the matter said.
In Germany, a successful acquisition of Fox’s stake in Sky Deutschland would force BSkyB to make a takeover offer for the remaining shares. BSkyB today said it would expect to make the bid for the outstanding 43 percent without a premium and any potential agreement is subject to external factors such as Sky Deutschland’s share price continue to trade “on an undisturbed basis.”
BSkyB had 15 million customers at the end of March, up 2.7 percent from a year earlier. Sky Deutschland had 3.73 million subscribers, while Sky Italia had 4.75 million. In Germany and the U.K., cable operators owned by billionaire John Malone’s Liberty Global Plc are the closest competitors for pay-TV users, according to Bloomberg Industries.
BSkyB’s nine-month sales rose 6.6 percent to 5.67 billion pounds, as the company signed up more customers for TV products. Its shares are down about 8 percent from a 12-year high reached in October, before former phone company BT Group Plc agreed to spend $1.4 billion to shut Sky out of the UEFA’s Champions League and Europa League soccer games.
“Many investors own Sky for either cash returns or for a possible bid, not for Sky buying expensive European pay-TV assets,” Bank of America Merrill Lynch analyst Daniel Kerven wrote in a note. “A possible deal makes sense for Fox but not BSkyB minorities.”
Assuming Fox maintains its 39 percent BSkyB stake, the potential deal would be “an opportunity for Fox to reduce its net exposure to incumbent pay-TV, which is losing value to new competition, content, connectively & the consumer,” he wrote.
Fox gets about one-fifth of its revenue from its satellite investments, with the rest coming from its cable and broadcast networks and its film and TV studios.
Fox itself is the result of a move last year by Murdoch to separate disparate businesses. The company was made independent by cleaving off News Corp.’s entertainment assets from its newspaper and publishing businesses.
While Murdoch agreed to split up News Corp. only after pressure from shareholders following the U.K. newspaper scandal, executives had signaled for years that they wanted to combine the satellite investments.
“We’ve made no secret of our belief over the years that we think the Skys are strong together,” James Murdoch, Rupert’s youngest son and Fox’s co-chief operating officer, said on a May 7 conference call. “Currently our focus is on operating each of those businesses as best we can.”