Can Murdoch Invade Europe?

His talks with Canal Plus aim to forge 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: France's market soared 15% last year, for example, while Britain's rose 11%.

Moreover, rapid advances in technology could soon turn pay-TV networks into home-shopping and Internet-access vehicles. Murdoch is on the verge of launching such a system, called Open, through the new 140-channel digital system Sky began rolling out last October. "Murdoch knows the best time to get a position is when things are in flux," says Matthew Horsman, an analyst at Henderson Crosthwaite Institutional Brokers Ltd. in London and author of a book about BSkyB, Sky High.

NEARLY NOTHING. Up to now, Murdoch's efforts on the Continent have met with frustration. 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. He is courting Canal Plus on the rebound from a failed attempt to buy into Telecom Italia's pay-TV unit, Stream. "Murdoch has knockEd on all the doors, [but] he has virtually nothing" on the Continent, notes Pathe's Seydoux, who is also BSkyB's chairman by virtue of Pathe's 17% stake in the broadcaster.

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, with Germany its only weak spot. Canal Plus is only a minor player in Germany, having sold its 37.5% stake in the Germanpay-TV channel, Premiere, which is owned by Kirch Group and Luxembourg's CLT-UFA.

If BSkyB and Canal Plus were to merge, a linkup would increase the companies' bargaining power with Hollywood over television and film rights. And it would give them more clout in cutting deals on sports coverage. "There needs to be a European group capable of facing global actors," says a source close to the talks. Any proposed merger, however, would draw the scrutiny of Europe's competition commissioner, Karel Van Miert. Last year, Van Miert blocked a digital tie-up between Bertelsmann and Kirch Group. "Van Miert is adamant that this new broadcast market must be kept open to competition," says Sean-Paul Branking, an antitrust lawyer at Bird & Bird in Brussels.

That's only the beginning of the problems bound to arise in pushing through a BSkyB-Canal Plus tie-up. Management conflicts are another big hurdle. BSkyB's management, led by American 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 March 3, Canal Plus announced that it "must have a dominant position in the management of the potential alliance," and that Canal Plus must remain a French company. Canal Plus has 11.6 million subscribers, compared with BSkyB's 7 million.

BSkyB is unlikely to concede control: Its market capitalization of $14 billion outpaces that of Canal Plus's $9.1 billion. A key player in the talks will be Pathe's Seydoux. Pathe is BSkyB's second-largest shareholder and is also 10.6% owned by Canal Plus and 19.8% by Vivendi, the French conglomerate that in turn owns 34% of Canal Plus. Seydoux hasn't tipped his hand, except to call the possible union "a great merger but difficult to achieve."

With all the obstacles, Murdoch and Lescure may opt to 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. Or Canal Plus may sell BSkyB stakes in its TV venture outside France. Another option could be for BSkyB and Canal Plus to share the interactive system that BSkyB is developing with British Telecommunications PLC. Such an arrangement would make sense when both companies are spending huge sums on expansion.

Indeed, big expenditures are hurting earnings at both companies. Analysts expect Canal Plus to report more than $100 million in losses in 1998, on revenues of $2.7 billion, largely because of expansion and digital-TV development costs. BSkyB has been hugely profitable in recent years. But in the last quarter of 1998, BSkyB's pretax profits dropped by 59%, to $84 million, because of the costs of launching its digital operations. Rebecca Winnington-Ingram, an 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.

A SCARY GUY. Murdoch's own reputation may not help him. He can be a sticky business partner and is known as a meddler in politics. European politicians are well aware of the anti-Europe stance of Murdoch's British newspapers, which have hectored Prime Minister Tony Blair about his preparations to take Britain into the European Monetary Union and pilloried German Finance Minister Oskar Lafontaine. "Murdoch scares a lot of people, especially politicians," says one television executive. And politicians feel very proprietary about their media. On Mar. 3, French Culture Minister Catherine Trautmann expressed disapproval of Murdoch and warned that the government would be sure to scrutinize any linkup closely.

Still, Murdoch can't be counted out. He has been a pioneer through BSkyB, revolutionizing stodgy British television. His digital system now looks likely to do it all over again, attracting a robust 350,000 new subscribers in just its first four months. The crucial question is whether Europe's TV players and politicians will decide they are better off allowing Murdoch in. In the U.S., Murdoch has never managed to become anything more than a small player in pay TV. To fulfill his Continental ambitions, a linkup with Canal Plus may be Rupert's last chance.

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