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Dealtalk: News Corp set for BSkyB price showdown
LONDON (Reuters) - Rupert Murdoch's News Corp (NWSA.O) will open talks in the next few days to secure British satellite broadcaster BSkyB (BSY.L), sparking a showdown with investors and potentially within the U.S. media conglomerate itself.
A year after the group first made its interest public, a protracted process of gaining regulatory approval is coming to an end, while BSkyB has gone from strength to strength as its programing proved appealing to stay-at-home consumers strapped for cash in the recession.
James Murdoch, recently promoted to deputy chief operating officer at News Corp and head of the group's international operations, said last week News Corp was not big enough, and spoke of the challenges of competing with new global rivals.
However his new boss, Chief Operating Officer Chase Carey, is taking a harder line in public on the price that News Corp is prepared to pay, even though most observers expect the deal to go through at a significantly higher level than News Corp has so far offered.
"It's overwhelmingly odds-on that it will happen," said media analyst Alex DeGroote at brokerage Panmure Gordon, putting the chances of failure at just 10 to 15 percent.
News Corp and BSkyB elected a year ago to seek regulatory approval before continuing price negotiations, which they said had stalled with News Corp offering 700 pence per share and BSkyB demanding over 800p.
The shares quickly rose from below 600p and are now trading at around 845 pence.
British Culture Secretary Jeremy Hunt is expected later this week to give the deal his seal of approval subject to a short public consultation.
Last week, hedge fund manager and BSkyB shareholder Crispin Odey was reported as calling for News Corp to pay 1,040p per share, or 4 billion pounds ($6.4 billion) more than its last offer and valuing the company at 19 billion pounds.
Stephen Adams, head of the UK equity team at top 10 shareholder Aegon Asset Management, told Reuters this week: "We are looking for considerably in excess of 8 pounds, with great emphasis on the 'considerable' part."
Most analysts are expecting a deal in the range of 900p to 950p, although News Corp is trying to calm expectations.
"We will be very disciplined about this process and we will pursue other options with our capital if we can't reach a reasonable deal," News Corp's Carey told analysts last month.
He called movements in BSkyB shares after it posted the latest in a series of forecast-beating results "clearly troubling ... These results validate the premium Sky was trading at last summer, but not a whole new premium on top," Carey said.
News Corp will also be determined to avoid fuelling an emerging reputation as a company that overpays for assets.
It bought the once high-flying social network Myspace for $580 million in 2005. Nearly six years later, Myspace is on the auction block with a price tag of around $100 million.
In 2007, it bought Wall St Journal publisher Dow Jones & Co for $5.6 billion, or about a 65 percent premium to its prior share price. It wrote down half the value in 2009.
Alan Gould, an analyst at U.S. investment banking advisory firm Evercore Partners, said he expected negotiations to drag out and for the U.S. group to make an initial bid of between 800p and 850p.
"News Corp shareholders would be happy if News Corp could buy BSkyB for 900p or less," he said. "I think they would be upset if News Corp pays 1,000p or more and somewhat indifferent in between ... This is a big deal. Every 100p is $1.8 billion. It is not a trivial amount."
Some analysts also believe regulatory risks lie in wait for BSkyB that could endanger the strong cashflows News Corp wants to harness.
"Since News Corp made their original offer, uncertainty has increased overall with regards to Sky's business model. One element regards the position of sports rights; another is the general economy," says Liberum Capital analyst Ian Whittaker, who noted technology issues also clouded Sky's prospects.
"Increasingly, TV is being delivered over the Internet, and so broadband speeds are becoming more important in the delivery of TV services," he said, noting BSkyB's lack of high-speed infrastructure, in contrast to rival Virgin Media VMED.O.
Guy Bisson, industry analyst with research firm Screen Digest, disagreed, saying the quality of BSkyB's content puts a gap between it and rivals.
"No one at this stage is going to pay what Sky is paying for premium football, movies, no one has the scale," he says. "Economic barriers to new entrants are quite high."
A banker who advises European companies said News Corp could even afford to pay over 10 pounds a share. "Even at 10 pounds the transaction looks to be significantly accretive for News Corp," said the banker, who asked not to be named.
James Murdoch himself, a former chief executive of BSkyB, seemed to underline the necessity of further expansion at the Cannes Lions advertising festival in France last week.
News Corp wholly owns pay-TV provider Sky Italia and holds a minority stake in Sky Deutschland (SKYDn.DE), as well as having extensive TV operations in other countries including India. But Murdoch saw the need to grow bigger still.
In an on-stage discussion, Murdoch talked about the challenge of regional TV providers competing with new and potential global market entrants such as Google Inc (GOOG.O), Apple Inc (AAPL.O) and other technology companies.
"When you look at the competitive set, we're not big enough," he said. "The question is how at News Corporation we can compete at scale globally."
(Additional reporting by Tommy Wilkes, Chris Vellacott and Victoria Howley in London and Jennifer Saba in New York; Editing by David Holmes)
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