Why Rupe’s high on Sky buy

News Corp.'s 39.1% share is no longer enough for Murdoch

LONDON– Rupert Murdoch has controlled U.K. pay TV giant BSkyB since he bowed Sky Television as a News Corp. division in 1989.

So last week’s news that the media mogul was bidding to buy the 60.9% he doesn’t already own in the satcaster is somewhat puzzling — why spend in excess of $11.6 billion to own the behemoth outright?

In keeping with the firm’s ethos, Murdoch wants to be in a winner-take-all position in terms of profits and corporate synergies, giving the conglom more operating flexibility as rivals like Google and Apple extend the scope of their activities.

Full control would give News Corp. another shot at taming the unruly beast that is the Internet.

The idea is that as a wholly owned digital gatekeeper, effective subscription synergies would emerge between Murdoch’s British TV and newspaper interests and also between his pay TV operations in Germany and Italy.

“The move makes perfect sense, and despite wrangling over price, I expect it to be a done deal by next June at the latest,” says Numis Securities media analyst Paul Richards, who predicts that BSkyB’s earnings per share will double by 2012, and the firm will be posting profits of $1.77 billion.

Despite concerns about media concentration of ownership, Richards is not alone in thinking that regulators in the U.K. and the European Union will approve the deal once terms have been agreed.

Blighty’s new media minister Jeremy Hunt summed up the feelings of many Murdoch watchers when he said, “It seems to me that News Corp. controls Sky already, so it isn’t clear to me that in terms of media plurality there is a substantive change, but I don’t want to second-guess what regulators might decide.”

Hunt’s administration, a coalition led by the Conservative Party, is even more well-disposed toward accommodating News Corp.’s grip on U.K. media than the Labour government, voted out of power at the British election May 6.

Rumors of a move by Murdoch on the chunk of BSkyB stock owned by third-party investors have been circulating for months.

BSkyB’s independent directors are holding out for more after rejecting Murdoch’s bids of $9.94 and $10.31 a share — a figure that values the paybox at $17.8 billion. The directors say they would consider no bid less than $11.78.

The timing of the bid, which emerged late June 14, comes as News Corp. erects paywalls for its British newspapers, the Times and the Sunday Times.

It follows a period of huge investment by BSkyB in broadband and HD services. Considering that each of the satcaster’s subscribers now spends an average of $740 a year, such moves have paid off.

“Sky is (earning) huge piles of cash, so it makes sense for News Corp. to want to take 100% of the profits,” says Mathew Horsman, who runs consultancy Mediatique and is the author of “Sky High: The Inside Story of BSkyB.”

Moreover, the pound is weak against the dollar and interest rates are low — more points in Murdoch’s favor.

These factors, combined with a belief that strong content is best acquired rather than grown organically, are also likely to have influenced News Corp.’s recent $222 million purchase of Virgin Media Television and plans to beef up its stake in U.K. shingle Shine, run by Murdoch’s daughter Elisabeth.

While free-to-air private webs funded by advertising face an uncertain future — it is understood that BSkyB decided against making a bid for Five, the U.K. terrestrial web recently put on the market by owners RTL — subscription-backed pay TV nevertheless looks robust.

“The decision to bid for outright ownership of BSkyB is completely consistent with Murdoch’s empire going hell-for-leather for pay models rather than (for ones based on) advertising,” suggests Peter Bazalgette, digital investor and media commentator.

“The company can make more from subscription than advertising, which is vulnerable to economic downturns, as broadcasters like ITV, in which BSkyB has a 7.5% stake, and Five have lately been reminded.”

Newspaper owners, including Murdoch, have watched aghast as the emergence of online news has all but ruined traditional business models for daily print publications.

Crucially, BSkyB’s subscriber base can be used as a potentially all-embracing distribution and revenue collection point for other parts of News Corp.’s U.K. activities, bundling together TV and online news offerings.

There are other potential corporate synergies, too. News Corp. could certainly show savings if its wholly owned pay TV platform Sky Italia and 45% owned Sky Deutschland — which is struggling to attract subs — could join with BSkyB in negotiating rights to content such as films and sports.

Having outright ownership of BSkyB would enable News Corp. to more effectively leverage its U.K. expertise in the TV biz to iron out problems across the English Channel and to provide the U.K. with the full firepower of News Corp.’s international footprint.

To paraphrase an opinion piece in British newspaper, the Guardian, BSkyB is a massive and well-run tollbooth on the digital media highway.

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