Fears he'll lose election wipe $1.3 bil from share price

With the political invulnerability of Italy’s Prime Minister Silvio Berlusconi finally fading in the face of gaffes, sexscapades and corruption charges, the market is taking a long, hard look at his Mediaset broadcast empire.

A breakaway center-right group has robbed Berlusconi of his parliamentary majority, and his poll ratings have fallen below 30% for the first time. Even if he survives a December confidence vote, his allies openly admit that a spring election is inevitable.

Judging by this month’s 14% drop in Mediaset’s stock price, wiping out some $1.3 billion of the company’s value, many don’t like the prospect of the its owner losing his post as head of government.

“The market is aware of the political situation,” says Augusto Preta, director of Rome-based IT-Media Consulting. “It’s reacting on impulse, though, and not necessarily reflecting what the situation will be like in a year’s time.”

Pundits note that some of Mediaset’s most successful trading periods have come when Berlusconi has been out of office.

The latest batch of unsavory headlines coincided with mixed nine-month financial results for Mediaset. Net profits rose nearly 5% to $267 million on the back of stronger advertising revenues. But Mediaset reported a net loss of $68 million, compared with a profit of $4.7 million a year earlier, due to rising costs and this concerned analysts.

Alessandro Bai-Badino of Deutsche Bank thinks Mediaset handled the press call badly.

He says execs failed to explain that spending increases on Mediaset’s three free-to-air channels and six digital terrestrial channels were deliberately being hiked from 1% to 3% to capitalize on the revival in advertising.

“The strategy is a good one,” Bai-Badino says. “It’s investing in the core free TV business to fully exploit the recovery in advertising. But the markets didn’t understand what (the company was) doing.”

Preta agrees that Mediaset has made a smart move in investing in TV content. “This is definitely the right thing to do,” he says. “The advertising market that’s going to grow the most is free-to-air.”

Mediaset declined to comment on new program purchases.

Questions remain regarding Mediaset’s Premium Gallery pay TV platform, which broke even for the first time in the third quarter. It has 4 million subscribers but is unlikely to reach its 4.8 million target by year’s end. Bai-Badino says the delayed switch to digital in some areas dented pay-TV growth.

When a regional switchover occurs, viewers with older TVs have to buy a decoder, which gives them an easy option of upgrading to Mediaset’s paybox — a boost the company missed out on.

Preta was cautious, however, not to overemphasize the lost opportunity.

“There is a feeling that Mediaset should have done better — even allowing for the digital switchover delay,” he says. “And I think you can put some of this down to the competition with (News Corp.’s) Sky Italia,” he says. “(But) the market for pay TV in Italy is not unlimited and competition between these two is not getting any easier.”

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