Bloomberg News

BSkyB Appeal for Vodafone, O2 Grows Amid Deal Spree: Real M&A

January 29, 2014

British Sky Broadcasting Group Plc (BSY) would be a tempting target for Vodafone Group Plc (VOD) or Telefonica SA (TEF) -- if billionaire Rupert Murdoch is ready to give up his stake in the U.K.’s biggest pay-TV provider.

“Everybody in the market knows Rupert Murdoch has the capability to surprise,” said Alex DeGroote, an analyst at Panmure Gordon & Co. in London. “Vodafone, with its very deep pockets” could step in, he said. “It’s not about what Sky wants, it’s about what Vodafone wants to do.”

BSkyB has a growing subscriber base and premium offerings at a time when the push to bundle phone, Internet and TV is sparking consolidation across Europe. Deals for European telecommunications and cable-TV companies reached an eight-year high in 2013 of $88.5 billion, according to data compiled by Bloomberg. Vodafone, on the prowl as AT&T Inc. passes up the right to bid for the U.K. mobile-phone company for six months, or Telefonica’s U.K. unit O2 may be interested, UBS AG said.

Standing in the way of any such deal is media mogul Murdoch, the $22 billion company’s biggest shareholder, who was blocked from acquiring the rest of the pay-TV provider in 2011 after a scandal involving phone hacking at his U.K. newspapers. BSkyB is a more affordable target after rival BT Group Plc won TV rights to two of Europe’s biggest soccer championships, sending BSkyB’s shares down almost 9 percent since October.

‘Attractive Asset’

“The value of the company has come down a bit,” said Bryan Keane, who helps oversee about $4.5 billion, including BSkyB and Vodafone shares, at Purchase, New York-based Alpine Woods Capital Investors LLC. “It still has a quality subscriber base. They’re still gaining market share. It’s still an attractive asset.”

Alice Macandrew, a spokeswoman for BSkyB, declined to comment on whether the company has been approached by a buyer or would consider a sale. Representatives for Vodafone and O2 also declined to comment.

Julie Henderson, a spokeswoman for Murdoch’s 21st Century Fox (FOX:US) Inc., declined to comment on the New York-based company’s plans regarding its about 39 percent stake in BSkyB. News Corp., Murdoch’s other company, competes with Bloomberg News parent Bloomberg LP in providing financial news and data.

BSkyB has more than 11 million customers, and it had revenue of 7.2 billion pounds ($11.9 billion) for its fiscal year that ended in June.

BT Inroads

After reaching a 12-year high of 950 pence in October, BSkyB shares have since fallen as former U.K. phone monopoly BT agreed to spend $1.4 billion shutting Sky out of the UEFA’s Champions League and Europa League soccer games. The stock closed yesterday at 867 pence.

Even as BSkyB increases production of original programs to help diversify its content beyond sports, the drop has left BSkyB trading at a price-earnings ratio of 14, lower than the industry median of 21, according to data compiled by Bloomberg. BSkyB’s ratio trails 89 percent of cable and satellite-TV companies with a market value of more than $1 billion, the data show.

“BT is making life uncomfortable and forcing prices up for rights,” Conor O’Shea, an analyst at Kepler Cheuvreux in Paris, said in a phone interview. Even so, “Sky has a loyal and long-established subscriber base and that’s not something replicable overnight, as BT will find out.”

BSkyB could be targeted by Vodafone or Telefonica as the carriers seek to better compete in Europe by offering broader packages of phone, TV and Internet service, said Polo Tang, a London-based analyst at UBS. Such a deal “could generate significant cost and revenue synergies,” he wrote in a Jan. 13 report.

Making Deals

“There’s so much convergence taking place nowadays that overlaps across the board between BSkyB, BT and Vodafone are only bound to increase overtime,” said Claudio Aspesi, an analyst at Sanford C. Bernstein & Co. in London. “BSkyB is a cheap asset now.”

Vodafone, based in Newbury, England, is stepping up spending to upgrade its network and make acquisitions after agreeing last year to sell its stake in Verizon Wireless in the U.S. to partner Verizon Communications Inc. for $130 billion.

The carrier already spent more than $10 billion to buy Germany’s Kabel Deutschland Holding AG last year after it acquired U.K. fiber company Cable & Wireless Worldwide in 2012. Vodafone had about 10 billion pounds in cash and equivalents as of September.

Market Position

Vodafone isn’t alone in making deals to fortify its position in Europe. Liberty Global Plc (LBTYA:US), the European cable company controlled by billionaire John Malone, agreed this week to fully take over Dutch broadband provider Ziggo NV (ZIGGO) for $6.7 billion. Last year, it bought the U.K.’s Virgin Media Inc. for about $16 billion.

“As a broadcaster you want your material on as many devices as you can,” said Steven Hartley, an analyst at Ovum in London. Vodafone’s purchase in October of German cable provider Kabel Deutschland illustrated the telecom company’s commitment to TV, Hartley said. “It’s got to do something to shore up that market position, so maybe buying BSkyB will be a roll of the dice; they’ll say, ‘Let’s just go for it.’”

Vodafone and BSkyB are already partners, striking a deal to show Sky Sports content on mobile phones last year. The two companies have had further discussions about giving Vodafone customers access to BSkyB’s Internet and TV services, people familiar with the companies’ plans said this month.

Stopping Short?

To be sure, combinations of mobile companies and broadband or TV providers are complicated and many operators stop short of full mergers.

Vodafone reached a deal with Deutsche Telekom AG in May to offer Internet speeds of as fast as 50 megabits per second as well as video and Web-based TV.

“Vodafone has said that they are looking to get access -- and the word access is important -- to pay TV and content,” said Guy Peddy, an analyst at Macquarie Group Ltd. “That is very different to ownership.”

Telefonica, O2’s Madrid-based parent, is increasing its influence over Telecom Italia SpA, and also agreed last year with Royal KPN NV to combine their German wireless businesses. At the same time, it sold off assets in Ireland and the Czech Republic to cut debt, which stood at about $83 billion as of September, according to data compiled by Bloomberg.

Fox Stake

Even if Vodafone or another buyer wants to do a deal, it all depends on Murdoch, who also owns stakes in cable companies across Europe through Fox, the TV and film company split off from News Corp. last year. Fox owns 100 percent of Sky Italia and controls Sky Deutschland in Germany, and it bid for all of BSkyB as part of a plan to win greater exposure to cable across Europe.

While the political repercussions from the hacking scandal may keep Fox from renewing its bid for all of BSkyB soon, Murdoch may in time consider making another run at the company to fulfill what Fox has characterized as unfinished business at its European TV operations, O’Shea at Kepler Cheuvreux said.

Murdoch “may still have his eye on buying them out to create his pan-European Sky network, but the hacking scandal hasn’t completely blown over in the U.K.,” Keane at Alpine Woods said. For him to agree to sell the stake “would require a stiff premium. The asset is very attractive.”

To contact the reporters on this story: Amy Thomson in London at athomson6@bloomberg.net; Kristen Schweizer in London at kschweizer1@bloomberg.net

To contact the editors responsible for this story: Sarah Rabil at srabil@bloomberg.net; Kenneth Wong at kwong11@bloomberg.net


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  • FOX
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  • LBTYA
    (Liberty Global PLC)
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