Rupert Murdoch’s BSkyB to Merge with German and Italian Sister Companies to Create Pay-TV Giant

21st Century Fox to net $7.2 billion cash from transactions

BSkyB logo

Rupert Murdoch-controlled U.K. pay-TV operator BSkyB announced deals Friday to take control of its German and Italian sister companies to create a pan-European pay-TV giant. The total value of the deals will be £5.35 billion ($9.09 billion).

Murdoch’s 21st Century Fox owns a 39% stake in BSkyB, 100% of Sky Italia and 57% of Sky Deutschland. The proposed deals will see BSkyB acquire Fox’s stakes in Sky Italia and Sky Deutschland. It also will bid for the remaining Sky Deutschland shares.

Fox said it will net after-tax cash proceeds of $7.2 billion on completion of the transactions, which are subject to regulatory approvals, the approval of BSkyB shareholders and usual closing conditions.

Industry analysts have speculated that 21st Century Fox would use the cash from the Sky deals to sweeten its bid for Time Warner above its initial $85 per share. But Fox says the proceeds will support its operating principles, including funding share buybacks. The conglom said it will continue its share repurchase program in 2015, with details to be announced Aug. 6 when it reports fiscal 2014 earnings. Fox has returned $12 billion to shareholders over the last three years.

“Our renewed authorization for our share buyback program will be executed regardless of any potential acquisition or investment activity by the company,” Rupert Murdoch said in a statement. “21st Century Fox’s number one priority is increasing shareholder value in a disciplined manner and, as a result, we will only consider transactions that fully support this objective.”

The acquisition of Sky Italia will cost £2.45 billion ($4.16 billion) with approximately £2.07 billion ($3.51 billion) to be paid in cash, and the balance to be secured through the transfer of BSkyB’s 21% stake in National Geographic Channel Intl. to Fox at a value of £382 million ($649 million).

The acquisition of Fox’s shareholding in Sky Deutschland will cost £2.9 billion ($4.92 billion) in cash, valuing Sky Deutschland at €6.75 ($9.09) a share. BSkyB will offer Sky Deutschland minority shareholders that price for the remaining shares.

The total worth of the deals to buy Sky Italia and 57% of Sky Deutschland would be £5.35 billion ($9.09 billion). Depending on how many Sky Deutschland minority shareholders accept the offer for their shares, the total cash consideration overall may be up to approximately £7 billion ($11.9 billion).

The merged entity, which some observers are calling Sky Europe, will have 20 million pay TV subscribers in the U.K., Ireland, Italy, Germany and Austria. Potentially, Sky Europe will be able to reach up to 97 million households. The German market offers large opportunities for growth. Only 20% of German households subscribe to premium pay TV channels, compared with 50% in the U.K., according to research group IDATE. Italy is a tougher market — Sky Italia has lost more than 200,000 customers since 2011.

Goldman Sachs analysts estimate that combining the three companies could generate synergies of £100 million ($170 million) by 2017, the Financial Times reported Thursday.

Jeremy Darroch, BSkyB’s chief executive, said: “This transaction will create a world-class, multinational pay TV business with enhanced headroom for growth and immediate benefits of scale. The three Sky businesses are leaders in their home markets and will be even stronger together. By creating the new Sky, we will be able to use our collective strengths and expertise to serve customers better, grow faster and enhance returns.”

James Murdoch, co-chief operating officer, 21st Century Fox, said: “Ultimately, a pan-European Sky is good for customers, who will benefit from the accelerated technological innovation and enhanced customer experience made possible by a fully integrated business. The transaction underscores our focus at 21st Century Fox on simplifying our structure while delivering significant value to our shareholders.”

Financial analysts have speculated in recent days that Murdoch’s long-term goal may be to acquire the remaining shares in BSkyB and then sell Sky Europe to a telco.

BSkyB also announced results for the 12 months ended June 30. Adjusted revenue was up 7% to £7.6 billion ($12.9 billion). Profit after tax was £937 million ($1.59 million), compared with £969 million ($1.65 billion) in 2013.