Murdoch's $14 Billion TV Plan Sets Up Showdown with Malone
Murdoch had once tried to build a satellite-TV giant in the U.S., only to lose it to Malone a decade ago. After emerging relatively unscathed from a phone-hacking scandal that tarnished his media empire, Murdoch is trying again, this time in Europe. It’s where Malone has spent almost $50 billion in the past decade amassing his own TV fiefdom.
As the 83-year-old chairman of 21st Century Fox Inc., Murdoch is working on a deal that would give British Sky Broadcasting Group Plc (BSY) control over Fox’s Sky Deutschland AG (SKYD) and Sky Italia satellite-TV units. A transaction could be valued at $14 billion and would give BSkyB -- of which Fox (FOXA) owns 39 percent -- more heft when negotiating for rights to entertainment and sports programs and with advertisers. The talks, while preliminary, could lead to the creation of a “world-class multinational pay TV group,” BSkyB said today, confirming a May 9 Bloomberg News report.
“What we’re seeing are the flickering flames of a never-extinguished idea -- of creating a pan-European entity that encompasses the Skys,” said Claire Enders, chief executive officer of research firm Enders Analysis in London. “This is the long-cherished dream of the family.”
Murdoch and Malone, 73, have for years been chasing pay-TV growth in Europe, where 41 percent of people have TV subscriptions, compared with 90 percent of Americans, according to research from Ovum Ltd. Europe’s low subscription rate highlights the potential for providers to offer more bundled packages of Internet, phone and TV programs.
Malone spent the past decade corralling the biggest European cable providers under his Liberty Global Plc (LBTYA), whose pay-TV operations stretch from Hungary and Austria to Germany, Belgium and the U.K. Its acquisition of Virgin Media Inc. in the U.K. last year put Liberty Global in head-to-head competition with BSkyB. London-based Liberty Global has 25 million subscribers.
Malone, whose cable cowboy nickname became the title of a biography, has amassed a European pay-TV empire that’s bigger than any cable operation he ever owned back home. The Colorado-based billionaire largely exited the U.S. cable market in 1999 when he sold Tele-Communications Inc. to AT&T Inc. for $59 billion.
Murdoch’s Fox owns Sky Italia and 57 percent of Sky Deutschland, and together they serve 8.5 million homes in Italy and Germany. Putting them under BSkyB would give the British satellite company more than 23 million subscribers.
While Murdoch’s ultimate goal for BSkyB remains unclear, a deal to consolidate assets in Europe could potentially set him up to increase Fox’s stake in the satellite operator -- a move that would likely require regulatory approval.
If Murdoch ever decided to sell instead, then BSkyB could be targeted by phone companies such as Vodafone Group Plc (VOD) as carriers seek to better compete in Europe by offering broader packages of phone, TV and Internet service, Polo Tang, a London-based analyst at UBS AG, wrote in a January report. BSkyB and Vodafone have discussed combining their services in the U.K., people familiar with the plans said in January.
Murdoch and his son James Murdoch, who sits on BSkyB’s board, have twice before tried to win control of BSkyB, the largest pay-TV service in the U.K. The most recent attempt failed in 2011 after political fallout from a hacking scandal at one of Murdoch’s most popular U.K. newspapers prompted him to abandon the bid.
The current deal discussions are noteworthy because it marks his first definitive attempt to shore up the European TV businesses since the earlier BSkyB plan fell apart.
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.
Closely held Sky Italia is valued at about 5 billion euros, people familiar with the matter said. BSkyB plans to offer a premium that could take the sale value to 10 billion euros, they said, asking not to be identified because the discussions are confidential.
The companies have been in talks for months, and a deal could be announced this summer, the people said. In its statement, Isleworth, England-based BSkyB said there is no certainty a transaction will take place. In a separate release, Fox said from time to time there are “internal discussions” about the ownership structure of European Sky-branded assets including BSkyB, while no agreement has been reached.
“We’ve made no secret of our belief over the years that we think the Skys are strong together,” James Murdoch said on a conference call last week before Bloomberg reported the talks. “Currently our focus is on operating each of those businesses as best we can.”
James, who previously ran News Corp.’s European operations and spent nine years in total as either chairman or CEO of BSkyB, is now co-chief operating officer of Fox. Last September, he was named chairman of Sky Deutschland.
Over the course of decades, Murdoch and Malone, both strong-willed billionaires with outspoken personalities, have been sometime allies and rivals.
Almost a decade ago, the two tussled over control of U.S. satellite-TV operator DirecTV in what became one of the most visible and contentious corporate battles in the industry. In the early 2000s, Murdoch started building a stake in DirecTV and eventually came to own about 38 percent.
Malone, who had helped to build the U.S. cable industry decades earlier, wanted full control of DirecTV for himself. In a cunning move, Malone accumulated a 19 percent voting stake in News Corp. before Murdoch could notice, making Malone the company’s second-largest voting shareholder. He was then in a position to threaten Murdoch’s control of the media empire the Australian mogul had built up over half a century.
By December 2006, the two agreed to swap their respective stakes. While Murdoch was able to maintain his hold over News Corp., the agreement signaled his retreat from the U.S. pay-TV industry.
Now the pair of media moguls are going head-to-head again.
Besides increasing negotiating powers for the enlarged company, the BSkyB deal could also facilitate the sharing of technologies such as BSkyB’s Adsmart targeted advertising platform and the Sky Go mobile application, according to Enders. Cost savings from joining the assets could also eventually be passed along to consumers, she said.
That’s crucial as the fight for pay-TV content heats up. Liberty Global last week stepped into TV production, joining Discovery Communications Inc. (DISCB), the company in which Malone has 29 percent voting rights, to acquire All3Media for almost $1 billion. The U.K.’s All3Media is one of the largest independent producers, with shows including “Midsomer Murders” and “Skins.”
In January, Discovery said it would raise its stake in Eurosport, making it more competitive against BSkyB and phone company BT Group Plc (BT/A) in bidding for TV sports rights.
BSkyB spends more than 2 billion pounds ($3.4 billion) a year on film and sports rights and original productions such as the upcoming “Penny Dreadful” series featuring Josh Hartnett. It signed an expanded partnership with HBO, the premium cable network owned by Time Warner Inc., earlier this year to develop and produce new original dramas.
“Will Malone and Murdoch increasingly compete over time? Yes,” said Claudio Aspesi, a media analyst at Sanford C. Bernstein & Co. in London. “There’s a massive amount of consolidation in Europe happening all of a sudden and this space is poised for more capital being injected.”
Marcus Smith, a spokesman for Liberty Global, declined to comment on competition with Murdoch’s properties including BSkyB.
Few companies have succeeded in creating a European network of pay-TV assets, Aspesi added. Unlike the U.S., European businesses tend to focus on increasing their size within a country since advertising and content are sold locally. Even production is done in-country because of different languages across the continent.
A combination of the Sky companies would leave Fox as a pure-play content business with TV networks and a movie studio, making it more attractive to investors who want to bet solely on entertainment programming and not distribution.
“It’s strategic, and it’s smart,” said Brett Harriss, an analyst with Gabelli & Co. “Content companies are doing really well right now -- Fox is a part of that.”
That wasn’t the case only a few years ago when the company’s future appeared in doubt following revelations that reporters at the News of the World had hacked into the phone messages of a murdered schoolgirl, inciting public outcry and criminal investigations.
To quell the anger, Murdoch shuttered the newspaper and apologized, while denying any knowledge of the hacking. A trial of former News Corp. employees is still under way.
Still, Murdoch was put on the defensive, a rare situation for the swashbuckling billionaire, and in 2012, he announced a major initiative to separate his declining newspaper business from the far more profitable entertainment division.
Since splitting in June, News Corp., his publishing company, has found its footing as a standalone business, with fiscal third-quarter earnings beating analysts’ estimates.
With his European businesses, Murdoch is building an even stronger position.
BSkyB continues to boost revenue as more customers sign up for its TV products, including on-demand service and software to view programs from mobile phones and laptops.
In the past year, BSkyB has faced increasing pressure from BT for pay-TV viewers and broadband customers after the former British phone monopoly announced three new premium sports channels last summer free with a broadband subscription. Then BT outbid BSkyB for the rights to two of the biggest European soccer contests.
“A consolidation of the Sky units in Europe would give Murdoch a powerful tool to become stronger and attract sales like a magnet on the old continent -- the best way to fight his old rival Malone,” said Francesco Siliato, a professor who specializes in media and telecommunications at Milan’s Politecnico University.