Coming off a year marked by splits, including his empire and marriage, can you blame Rupert Murdoch for making 2014 all about bringing companies together?
That’s the modus operandi at 21st Century Fox. Earlier this month, the conglom confirmed its intent to consolidate its stakes in three different Sky-branded satcasters across Europe. In addition, Murdoch is negotiating with Apollo Global Management to form a joint venture that will unite their respective production companies, which include the private equity firm’s massive Endemol unit.
Fox and its would-be partners declined comment, but have issued statements acknowledging ongoing negotiations. Neither deal is a sure thing, but if Murdoch manages to make them happen, they will represent the biggest moves he’s made since sequestering his publishing assets, which remain the focus at News Corp.
And while the BSkyB and Apollo deals have nothing to do with each other per se, they bear notable strategic similarities that give a sense of how Murdoch is thinking these days about how Fox plans to keep pace with a global media landscape that has been transforming rapidly around him. While the deals are set in the parallel worlds of production and distribution, both essentially establish holding companies with outside partners to house multiple entities. They’re a cost-effective way to achieve scale, with a kicker: setting up Murdoch for 100% ownership of the ventures in the future.
But in the short term, increasing his investment in content while separating the satellite properties is a logical extension of the Fox-News Corp. split, per Needham & Co. analyst Laura Martin. “He got rid of newspapers; now he’s getting rid of distribution,” she said. “Fox is getting out of being a conglomerate and getting into being a pure-play content company. That gives it a faster growth rate, higher returns on capital and higher multiples.”
The U.K. is a more sophisticated pay-TV market than Italy or Germany, which gives BSkyB the opportunity to exploit its expertise in additional products that can drive average revenue per user in those markets. While Murdoch owns all of Sky Italia, he owns a little more than half of Sky Germany and 39% of BSkyB.
But Murdoch is playing catch-up in the sector in Europe: While merging all his satcaster stakes there amounts to a $14 billion deal, John Malone has spent nearly four times that amount on a string of European pay-TV acquisitions in recent years. A BSkyB merger would also put the size of the company’s customer base — about 20 million — behind only Liberty Global, which has 25 million subscribers.
A bigger footprint gives BSkyB the ability to acquire multi-territory rights to top-shelf programming like soccer leagues and blockbuster movies. That’s not the country-by-country sales content owners are accustomed to making, but it’s a model in line with the kind of global deals that Netflix and other streaming services are looking to make, according to Tim Westcott, a London-based media-industry analyst with research firm IHS. “They are going against the grain of the international TV industry,” he said.
All together, the “SkyEurope” entity could set up Murdoch for another run at snapping up BSkyB, after News Corp. aborted such an attempt in 2011 amid regulatory pressure and the conglomerate’s wiretapping scandal. That could very well trigger regulatory fears all over again, but it’s not a deal-breaker.
Don’t be surprised if Murdoch also ends up getting the Endemol-Shine-Core joint venture to himself as well. As a private equity firm, Apollo will be looking to flip sooner rather than later; the deal will likely give Murdoch an option to purchase the stake he doesn’t own at a later date.
Joining forces with Apollo works on several levels for Fox. First, there are the cost-reducing synergies that come with combining local production and distribution operations. That’s especially needed overseas, where the deal gives the conglom’s growing Fox Intl. Channels portfolio a more robust inhouse content supplier. The move also helps makes sense of Shine, which Murdoch bought from his daughter, Elisabeth Murdoch, in 2011 for $673 million, a sum that has drawn considerable criticism. While Fox’s U.S.-based studios largely focus on scripted programming, Shine and its new partners will be better able together to serve the demand for churning out unscripted formats worldwide.
As for sorting out how to reduce the overlapping areas between this trio of shingles, don’t look for Elisabeth Murdoch to do that; she’s said to have little to do with Shine anymore. A board consisting of Endemol’s Tim Hincks and Just Spee, Core’s Marc Graboff and Shine CEO Alex Mahon is to be tasked with oversight of the JV. These companies help solve each other’s problems: Endemol has a ton of debt and is much stronger overseas than in the U.S., while Core needs to diversify beyond its fading “American Idol” franchise and take advantage of Fox’s international distribution capabilities.
So just what will Elisabeth Murdoch do next, now that her papa set his succession plans for his sons in March? Pairing her with some piece of the Fox empire may well be next on Murdoch’s to-do list.