There’s business and strategic logic for both 21st Century Fox and BSkyB in the proposed consolidation of Rupert Murdoch’s European pay television interests within the UK entity.
BSkyB yesterday confirmed speculation that it was talking to Fox about acquiring its pay TV businesses in Germany and Italy.
Fox owns 100 per cent of Sky Italia and about 57 per cent of Sky Deutschland. A sale of those interests to BSkyB, itself 39 per cent owned by Fox, would be worth about $US14 billion.
The business logic is obvious for both groups. Bringing the European pay TV interests together within one vehicle would create far greater scale for BSkyB, adding 4.8 million subscribers in Italy and 3.7m in Germany to its own 10.6m in the UK.
That would enhance its capacity to buy and develop programming, spread the costs of developing and distributing new set-top box technology across a larger base, lower the production costs for news and sports programming, enhance its ability to compete with on-demand internet-streaming competitors like Netflix and generate some administrative cost savings.
It would also give BSkyB access to less mature markets with potentially higher growth rates as well as the ability to replicate the bundling of pay TV, internet, telephony and on-demand services that has been a successful strategy in the UK.
For Fox, apart from releasing a big wad of cash even in the context of its own $US80bn market capitalisation, it would further simplify its own structure after last year’s separation from News Corporation’s newspaper and publishing businesses.
It would become fundamentally a content business, albeit one with its foot strongly on a European distribution platform via its continuing 39 per cent stake in an enlarged BSkyB.
While vending its Italian and German pay TV interests into BSkyB would be a reversal of Murdoch’s long-pursued strategy of vertically integrating his film and television production and distribution businesses, the phone hacking scandal in the UK ended his aspiration of acquiring 100 per cent of BSkyB for the foreseeable future.
Murdoch made several attempts to acquire the outstanding shares in BSkyB, with the 2011 bid withdrawn after the scandal emerged.
Having seen the benefit of a purer play through the demerger of Fox from News Corp, the consolidation of the European businesses within BSkyB would be more appealing.
Given the changing shape of the European pay TV sector, it also makes broader strategic sense for BSkyB and Fox and fits within the long-held vision of both Rupert and James Murdoch of a pan-European Sky pay TV business.
Across Europe there have been a number of transactions combining pay TV businesses with telecommunications companies. Vodafone has been particularly active. It acquired a Spanish operator earlier this year for more than $10bn after buying a German business last year for more than $11bn. BT has also been active, while Spain’s Telefonica spent about $1bn this month on a Spanish business.
The player Murdoch would be most focused on, however, would be his arch-rival John Malone. Malone’s Liberty Global has been buying into European pay TV businesses for a decade, but last year spent $17bn to acquire Virgin Media in the UK, making it a very direct competitor to BSkyB and giving it a European base of about 25m subscribers.
Liberty recently began buying into production companies and appears to be pursuing the same kind of scale benefits that underpin BSkyB’s discussions with Fox.
Malone and Murdoch have been rivals for decades. It was Malone, who by accumulating a strategic stake in News Corp and threatening Murdoch’s control, forced Murdoch out of satellite TV in the US, with News buying back the Malone stake in 2006 by selling Liberty its 38 per cent stake in Direct TV.
With Liberty in expansion mode in Europe, broader consolidation occurring and telecommunications companies pursuing the triple-play formula that has been successful for BSkyB in the UK, it makes sense for the Sky portfolio to be consolidated and strengthened within the UK entity and the opportunities of scale pursued.
The discussions between BSkyB and Fox may not come to anything -- they’d have to agree on price and terms -- but there are strong arguments as to why the creation of a pan-European pay TV operator makes commercial and strategic sense.
Business Spectator is owned by News Limited, a division of News Corp.