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B-Sky-B Refinancing Plan Still Up In Air

The board of BSB Holdings, which owns 50% of British Sky Broadcasting, wrestled in vain April 26 over the crucial refinancing designed to guarantee the satellite company’s future through the next two years.

After the board meeting, which adjourned until April 29, Reed Intl. disclosed it had informed its partners in BSB Holdings – Chargeurs, Pearson and Granada – it had decided not to pump further funds into the five-channel direct-to-home venture.

Reed, the international publishing group (whose holdings include VARIETY and DAILY VARIETY), signaled that while it has faith in the longterm success of BSkyB, it wants to concentrate resources on its core businesses: publishing and information.

Reed has spent £ 180 million ($302 million) on its 10.45% stake in BSB as equity investment, loans and letters of credit. The decision means its share will be diluted; by how much won’t be clear until the refinancing arrangements are finalized.

The BSkyB partners need to arrange a new tranche of funds – some £ 200 million ($336 million) – to replace a £ 380 million ($638 million) project loan that was revoked following the merger last November of British Satellite Broadcasting and Rupert Murdoch’s Sky TV. Half of that coin is to come from BSB Holdings, the balance from Murdoch’s News Corp.

The BSkyB shareholders have indicated they will raise further funds via a rights issue. BSkyB says £ 200 million ($336 million) will keep the company afloat for two years, when it expects to reach breakeven.

“We are confident both about the longterm potential for satellite television in the U.K. and the viability of BSkyB following the merger,” said Reed Intl. chairman/CEO Peter Davis.

“We very much hope that the talks on refinancing will be successful and we wish the project well.

“However, the [Reed] board does not wish to increase its investment further in BSkyB as we prefer to invest in our core publishing and information businesses, where we have more direct management control.

“We have therefore decided to make no further funds available and have also decided in principle to take as an extraordinary charge a writedown on our investments in the project,” he said, adding that details would be disclosed June 5 with Reed’s preliminary results for the year ending March 31.

As a result of Reed’s decision, Ian Irvine, Reed deputy chief exec, has resigned as chairman and director of BSkyB, but he will remain a director of BSB Holdings. His likely replacement is Frank Barlow, chief exec of Pearson.

A Reed statement pointed out that at the time of the merger, Reed had made more funds and bridging finance available to BSkyB, and it was assumed that further funding would be available in bank loans. It said that subsequent discussions led the BSkyB shareholders to conclude that a rights issue was preferable.

It was unclear after the board meeting why the shareholders failed to agree on the refinancing. Before the meeting, there were signs that Pearson and Charguers were prepared to up their stakes if Reed called a halt. It was less certain whether Granada, which, along with other ITV companies is certain to face competition in the franchise renewal round later this year, is willing to increase its exposure in BskyB.

It’s also understood that Murdoch, himself under severe pressure to reduce debt, was not satisfied with the refinancing proposals. Murdoch had indicated he wanted at least some of his contribution to be in the form of rights to films from 20th Century Fox.

A series of savage economies since the merger have made BSkyB a much leaner, more efficient operation. In the past few months, losses running as high as £ 6 million ($10 million) a week have been whittled down to about £ 2 million ($3.36 million) a week. More than 1,000 staff members were let go, programs were axed and the number of channels reduced from nine to five.

But funds are low and the refinancing must be in place by next month to enable the company to meet commitments.

BSkyB calculates it needs to sell 60,000 to 65,000 dishes per month. In February, traditionally a slack month for consumer spending, it sold 41,000 dishes. But it expects to stimulate demand via a marketing campaign now in full swing, using a big chunk of this years £ 30 million promo budget.

Typifying the bullish outlook among shareholders, a senior exec at Pearson told VARIETY before the board meeting: “In the long run, the numbers are very attractive. It will be another 18 months before it is proven to be a viable business.”

However, Reed’s reluctance to put in new money has prompted some observers to question whether £ 200 million ($336 million) will be enough to enable BSkyB to reach breakeven, and whether it will be forced to ask its shareholders for more down the line.

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