BSkyB’s plan to buy Rupert Murdoch’s pay-TV assets in Italy and Germany for up to €10bn is a bold bet on long-term growth at the expense of short-term profit, but the pioneering British media firm has pulled off such gambles before.
Facing the toughest market conditions in its 25-year history, BSkyB has opened talks with Murdoch’s 21st Century Fox to acquire Sky Deutschland and Sky Italia to create a European powerhouse with 20m subscribers.
BSkyB, also 39%-owned by the Australian-born media mogul, has set the standard in Britain for technological innovation such as its award-winning Sky+ set-top box, streaming TV app, and Europe’s first 3D channel.
Having seen off a string of challengers to dominate the British pay-TV market, BSkyB, which is in more than 10m homes in Britain and Ireland, is now betting that the time is right to enter two European markets where pay-TV is not yet as popular or profitable.
“The asset is too good and the opportunity is too big to ignore it,” one top 10 shareholder in BSkyB told Reuters, adding that they would view the deal positively as long as they could agree reasonable terms.
Analysts have put the likely price at between €7bn and €10bn.
BSkyB, which declined to comment, has history in making expensive but ultimately winning gambles. Back in 2006, it set out plans to offer broadband for free, spooking analysts and investors who feared the gamble would be costly, but the strategy paid off by luring new customers who took its other subscription services.
It also led the way in investing in high definition programming.
Analysts and investors are divided over whether the new deal is aimed at creating scale, so it can better compete with new online challengers such as Netflix, or is more a reflection of Sky’s saturated home market, which is forcing it to look overseas to find growth.
Many see the hand of Murdoch behind the deal since it would give Fox billions of euros in cash at a time when the 83-year-old mogul is looking to expand in content.
Fox revealed on Wednesday it had tried and so far failed to
buy media conglomerate Time Warner, with a source putting the price at roughly $80bn (€60bn).
A separate source close to the Sky talks said they did not expect Murdoch to raise his holding in BSkyB, which would be contentious in Britain, where rivals and some politicians believe he controls too much of the media.
BSkyB, which is facing a new challenge at home from telecoms group BT, which is aggressively bidding for content and customers, would expand its potential market to 95m households by moving into Italy and Germany.
A larger group would be able to better absorb higher programming costs, co-produce content and be well placed to buy broadcasting rights on a pan-European basis if that ever replaces the current country-by-country basis.
It could also save some costs on procurement and back-office functions, while generating increased revenue by rolling out services into Italy and Germany that have sold well in Britain, such as targeted advertising and betting services.
Analysts however are divided over the potential cost and revenue synergies for the deal, with Berenberg struggling to see meaningful savings, while UBS forecasts synergies of up to £380m per year.
“This is not a massive synergy story,” Berenberg analyst Sarah Simon said. “It’s more about accessing higher growth because these are markets with low penetration.”
However, it could take a while for the benefits of creating a so-called Sky Europe to pay off, as the risks of entering Germany and Italy are not inconsequential.
Sky Italia, 100% owned by Fox, is Italy’s biggest pay-TV operator in a market where those willing to pay for TV has slumped during the downturn, to 34% of households in 2013 from almost 40% just four years earlier, according to Bernstein Research.
With its 4.75m subscribers unable to provide much revenue growth, Sky Italia has kept a tight lid on costs.
Against that background it did well in late June to win exclusive rights to more Serie A soccer matches at roughly the same price as before, but it has lost the Champions League matches to rival Mediaset Premium, owned by former Italian prime minister Silvio Berlusconi’s TV group Mediaset.
In Germany, the market is less constrained by economic pressures than by long-established habit.
According to industry research, less than 20% of German households pay for television, well below the 54% in Britain, due in part to the strong position of German free-to-air TV.