Sky’s the limit

Murdoch revs global satellite strategy

This time round, Rupert Murdoch isn’t buying or bullying his way around the globe: He’s tying a big ribbon around his worldwide satellite assets, calling it Sky Global Networks and offering it up to the public — and to potential partners.

Selling off a chunk of Sky Global in an initial public offering this fall will bring in billions of dollars and a newly minted stock to use as currency for acquisitions.

After all, acquisition is still the name of the game for the media world’s most global mogul.

“It was the right point in time to create a platform, one with unique global reach,” said Sky Global’s new president and CEO Chase Carey.

Not everyone, however, sees Murdoch’s latest move as clear-cut — or innocuous.

To some, especially Europe’s power players, the creation of Sky Global is laden with subtext: They suspect the move may be a complex maneuver by Murdoch to extend his tentacles even further.

What is certain is that News Corp.’s assets — from Britain’s BSkyB to Asia’s Star to Italy’s Stream — have hit critical mass. Hence, the Murdoch forces argue, they should be bundled together and made easily accessible to investors and opportunities around the world.

Disparate pieces of Murdoch’s pay TV empire packaged together could, in fact, create a powerful force to drive costly new technology, explore the promise of interactive television, fight piracy, forge alliances and keep a step ahead of the competition.

And after Murdoch’s gotten so far, but no farther, in his European ambitions, Sky Global, a step removed from him, may present a less threatening face to would-be competitors and governments.

The network of alliances it aims to create could, by association, help draw some highly coveted nonsatellite assets into the News Corp. fold.

Europe is the prize, and Italy could be the winning move Murdoch still needs to make.

News Corp. owns 42% of Italian pay TV operator Stream, on the way to a 50% stake, all in Sky Global. Partner Telecom Italia is apparently willing to pool its half of Stream into Sky Global.

Meanwhile, Murdoch is still itching for a piece of Silvio Berlusconi’s Mediaset TV empire. He’s made several unsuccessful runs at the company, whose holdings include three domestic TV networks plus a stake in Spain’s lucrative station Tele Cinco — another plum Murdoch is said to be eyeing.

But regulators and Berlusconi family members balked when Murdoch charged in and tried to buy Mediaset several years ago.

Other countries have been equally Rupert-phobic in the past.

Sky Global may disarm some suspicion since it will have minority stakes in many of the businesses in its portfolio — at first.

News Corp.’s goal, however, is clearly to turn those little pieces into big pieces. “I think it’s safe to say we plan to aggressively grow the company,” Carey said.

But it will be done through inclusion. Think of Sky Global as a big mess tent where everyone gathers, rather than as an invading army.

Trade fair

News Corp.’s objective is to convince its partners to exchange pieces of operating businesses they hold in common for pieces of Sky Global.

That could mean Vivendi contributing its 20% of BSkyB, Liberty Media handing over its 20% chunk of TV Guide, Telecom Italia pooling Stream or Kirch handing off its stake in KirchPayTV.

Murdoch may also take a 3% stake in the Kirch Group, gaining a toehold in the German conglom’s other TV assets.

If Sky Global fully controls its assets, it can consolidate management and become a real operating company itself. It can get more done that way.

And shares of operating companies trade at a premium to investment or holding companies.

Vexing Vivendi

Meanwhile, French conglom Vivendi continues to be a tough nut for Murdoch to crack.

Vivendi won’t hand over its BSkyB stake without conditions that include a major strategic role in Sky Global with some oversight of Internet activities plus a role for its own new digital portal, Vizzavi.

“We are very interested in Sky Global, but we want to be more than just a financial partner,” insisted a person close to Vivendi, which is in the process of merging with Universal Studios parent Seagram.

Still, many think that with their complex interlocking relationships and shared European ambitions, News Corp. and Vivendi are bound to be in business together.

Carey, who also serves as News Corp.’s co-chief operating officer, declined to discuss the IPO or Sky Global’s strategic plans in detail, citing an SEC-imposed quiet period ahead of the offering.

Valued at $30 bil

News Corp. plans to sell the public 10%-15% of Sky Global and analysts estimate the entity is worth some $25 billion-$30 billion.

Sky Global execs and bankers will take their baby on a road show in late September or early October with the IPO to follow.

They’ll be hawking a cocktail of assets including News Corp.’s 38% stake in giant U.K. satcaster BSkyB, (and BSkyB’s 24% of KirchPayTV); its 42% of Stream, which is operated in partnership with Telecom Italia; 100% of money-losing pan-Asian satcaster Star; 10% of Sky PerfecTV in Japan; 36% of SkyBrazil; 30% of Sky Mexico; and 30% of Sky Multi-Country Partners, serving Colombia, Chile and Argentina.

The deal has some Wall Streeters salivating.

In an April report, Merrill Lynch’s Jessica Reif Cohen said Sky will launch News Corp. into “an unparalleled global position as the only company capable of providing a video and data infrastructure to the bulk of the world.” (Merrill and Goldman Sachs are the IPO’s lead underwriters.)

For hardy investors, a company that’s rolling out pay TV and promising a host of interactive services in developed and developing countries around the world may be just that.

Even taken as is, Sky Global’s assets will benefit from their closer links in terms of financing, new technology and programming, say analysts in New York and London. In the U.S., News Corp. owns 20th Century Fox, the Fox TV network and a handful of cable and regional sports networks.

And Wall Streeters are looking forward to a day when earlier stage — read, money-losing — companies like Star in Asia won’t be as much of a drain on News Corp. earnings.

Self-financing assets

In Sky Global, “They can become self-financing, raise more equity if need be. It’s good to isolate them in a little pen and make them fend for themselves,” said fund manager Sal Muoio.

Star lost $77 million on revenue of $200 million in the nine months ended in March. It’s well positioned for the long term but faces challenges in many of its biggest markets. Mainland China, for instance, restricts the distribution of foreign satellite channels to the general public and prohibits foreign ownership of cable systems.

That Murdoch’s trademark deals are often long-term and strategic means he hasn’t been as responsive to profit concerns as Wall Streeters may have wished. He invests heavily in new projects, making big purchases when he finds ones he likes, often diluting earnings.

In August, he agreed to pay $85 a share, or nearly $3 billion, for 10 TV stations in large U.S. markets that belonged to Chris-Craft. The assets are terrific, but most Wall Streeters agreed that the price was exorbitant.

That sense of unpredictability, and the fact that U.S. investors couldn’t be bothered analyzing complex financials of companies called Star and Sky that were halfway around the world, meant more money tended to flow into competitors like Time Warner, Viacom and Disney.

Many investors still remain cautious. Some doubt that the financial results of the satellite biz will be any more transparent in Sky Global.

“They shift money around from one place to the other. The profits and losses aren’t always the real numbers,” said one analyst.

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