First order of business: cutting cost of H'wood pix, TV

After a nine-month delay, Spanish pay TV operator Sogecable and telco Telefonica agreed Wednesday to merge their rival digital satellite TV platforms, potentially creating one of Europe’s most powerful pay TV operators and spelling bad news for U.S. studios.

Top of the agenda for the new colossus will be to slash the cost of buying Hollywood movies and TV shows. The American studios are already grappling with a downturn in demand for their movies and series on terrestrial TV stations across Europe.

The Spanish move follows the emergence of single-pay TV players in Italy, Germany and the U.K. Recent prices paid for U.S. movies by Germany’s Premiere platform, for example, are some 20% lower than they were five years ago.

Nonetheless, Hollywood suppliers contend they’d rather see one healthy player in each key Euro territory than two or more that are struggling. In addition, it’s usually the indie suppliers of movies and series that get dumped from merged platforms rather than the majors themselves.

Per the terms of the deal, Sogecable’s Canal Satellite Digital will swallow up Telefonica’s Via Digital to create Europe’s third-largest pay TV player after the U.K.’s BSkyB and France’s Canal Plus.

New entity, yet to be named, will have competition only from fledgling cable operators.

Merger follows a year of upheaval in the Continent’s pay TV industry with operators forced to partner up with rivals or go out of business altogether.

Laboring under $1.8 billion in debt, the newly merged Spanish satcaster will seek to drive down existing and new deals with movie product suppliers.

Spain’s government has already placed a three-year limit on the platform’s new output deals with Hollywood studios, apparently a pre-condition for greenlighting the merger.

Nonetheless, Sogecable and Telefonica said they would appeal against a clutch of government-imposed limitations, including one on “strategic deals” — perhaps a reference to those output deals with the Hollywood majors.

Spanish suppliers are also concerned that deals for local product could get squeezed by a newly revamped platform.

The new Sogecable is additionally likely to renegotiate the prices it pays to carry niche channels, and some poorly performing services could be kicked off the platform.

However, niche webs supplied by Hollywood studios — Sony’s AXN, Paramount’s Comedy and AOL’s Cartoon Network, among them — are probably well placed to survive the purge.

The two Spanish companies announced their desire to combine last May. Deal was subjected to a litany of antitrust rulings, culminating in Spain’s government setting 34 conditions for the merger Nov. 29.

Complex combo

The merger itself is complex. Sogecable is controlled by Spain’s media and publishing giant Prisa and France’s Canal Plus. Under the deal, Telefonica will take at least 16% in Sogecable, while Prisa will drop its 21% stake in Sogecable to 16% and Canal Plus will do the same.

The three shareholders will put up p50 million ($53.8 million) each to underwrite a new credit facility.

Telefonica also has committed to underwrite a subordinated loan of $188 million.

Further measures to drive down debt — such as a share capital increase — could, however, prove unpopular with both shareholders and banks.

And doubts remain about the Canal Plus stake. If its parent, Vivendi Universal, were to unravel its media interests, Sogecable and Telefonica could find themselves with a new partner.

“It will not be a bed of roses,” Prisa prexy Jesus de Polanco said after the merger announcement.

Nor will changes happen overnight.

The new company, says de Polanco, should be up and running by June. But execs may not have their feet fully beneath their desks until early next year.

Shares in Sogecable closed 5.4% higher at x10.27 ($11.10) Wednesday, extending a 6% gain on Tuesday triggered by expectations that the deal would be approved.

Its parent company Prisa rose 0.8%, while Telefonica slipped 0.3% to x9.09 ($9.80) a share.

(Emiliano De Pablos in Madrid contributed to this report.)

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