(Corrects name in para 25 to Sullivan from Williams)
* BSkyB in talks to buy Fox's German and Italian units
* Italian business hit by macro economic pressure
* German market constrained by strong free offering
* Analysts put price between 7-10 bln euros
By Kate Holton, Danilo Masoni and Harro Ten Wolde
LONDON/MILAN/FRANKFURT, July 18 BSkyB's
plan to buy Rupert Murdoch's pay-TV assets in Italy and Germany
for perhaps as much as 10 billion euros is a bold bet on
long-term growth at the expense of short-term profit, but the
pioneering British media firm has pulled off such gambles
Facing the toughest market conditions in its 25-year
history, BSkyB has opened talks with Murdoch's 21st Century Fox
to acquire Sky Deutschland and Sky Italia to
create a European powerhouse with 20 million subscribers.
BSkyB, also 39 percent-owned by the Australian-born media
mogul, has set the standard in Britain for technological
innovation such as its award-winning Sky+ set-top box, streaming
TV app and Europe's first 3D channel.
Having seen off a string of challengers to dominate the
British pay-TV market, BSkyB, which is in more than 10 million
homes in Britain and Ireland, is now betting that the time is
right to enter two European markets where pay-TV is not yet as
popular or profitable.
"The asset is too good and the opportunity is too big to
ignore it," one top 10 shareholder in BSkyB told Reuters on
condition of anonymity, adding that they would view the deal
positively as long as they could agree reasonable terms.
Analysts have put the likely price at between 7 billion and
10 billion euros. Sources familiar with the deal have told
Reuters the talks are progressing well but that there are still
many areas they need to find agreement on.
BSkyB, which declined to comment, has history in making
expensive but ultimately winning gambles.
Back in 2006, it set out plans to offer broadband for free,
spooking analysts and investors who feared the gamble would be
costly, but the strategy paid off by luring new customers who
took its other subscription services. It also led the way in
investing in high definition programming, which also proved
extremely popular, boosting the amount customers paid each
Analysts and investors are divided over whether the new deal
is aimed at creating scale so it can better compete with new
online challengers such as Netflix or is more a
reflection of Sky's saturated home market, which is forcing it
to look overseas to find growth.
Many see the hand of Murdoch behind the deal since it would
give Fox billions of euros in cash at a time when the 83-year
old mogul is looking to expand in content.
Fox revealed on Wednesday it had tried and so far failed to
buy media conglomerate Time Warner Inc, with a source
putting the price at roughly $80 billion.
A separate source close to the Sky talks said they did not
expect Murdoch to raise his holding in BSkyB, which would be
contentious in Britain, where rivals and some politicians
believe he controls too much of the media.
APPEALING TO THE MASSES
BSkyB, which is facing a new challenge at home from telecoms
group BT, which is aggressively bidding for content and
customers, would expand its potential market to 95 million
households by moving into Italy and Germany.
A larger group would be able to better absorb higher
programming costs, co-produce content and be well placed to buy
broadcasting rights on a pan-European basis if that ever
replaces the current country-by-country basis.
It could also save some costs on procurement and back-office
functions, while generating increased revenue by rolling out
services into Italy and Germany that have sold well in Britain,
such as targeted advertising and betting services.
Analysts however are divided over the potential cost and
revenue synergies for the deal, with Berenberg struggling to see
meaningful savings, while UBS forecasts synergies of up to 380
million pounds per year.
"This is not a massive synergy story," Berenberg analyst
Sarah Simon said. "It's more about accessing higher growth
because these are markets with low penetration."
However, it could take a while for the benefits of creating
a so-called Sky Europe to pay off, as the risks of entering
Germany and Italy are not inconsequential.
Sky Italia, 100 percent owned by Fox, is Italy's biggest
pay-TV operator in a market where those willing to pay for TV
has slumped during the downturn, to 34 percent of households in
2013 from almost 40 percent just four years earlier, according
to Bernstein Research.
With its 4.75 million subscribers unable to provide much
revenue growth, Sky Italia has kept a tight lid on costs.
Against that background it did well in late June to win
exclusive rights to more Serie A soccer matches at roughly the
same price as before, but it has lost the Champions League
matches to rival Mediaset Premium, owned by former Italian Prime
Minister Silvio Berlusconi's TV group Mediaset.
In Germany, the market is less constrained by economic
pressures than by long-established habit.
According to industry research, less than 20 percent of
German households pay for television, well below the 54 percent
in Britain, due in part to the strong position of German
While the Sky Deutschland business is growing strongly in
terms of customer additions and revenue, due to the appeal of
its soccer programming, it has not made an operating profit in
recent years and is only expected to turn positive next year,
according to Reuters data.
BSkyB is unlikely to radically change the way the business
is run - Sky Deutschland's CEO Brian Sullivan spent 13 years at
BSkyB - but the timing of the deal in terms of its recovery and
growth profile could be good for the British firm.
A large factor in whether BSkyB shareholders will back the
deal will be whether it acquires all of Sky Deutschland or just
the 57 percent owned by Fox. Under German takeover rules a deal
for the Fox stake would trigger a mandatory offer for the rest.
That in turn would affect how much BSkyB would need to pay,
and whether it would need to issue equity or pay for the deal
with debt and cash. On Thursday it said it had sold a 6.4
percent stake in British broadcaster ITV for 481 million
pounds to cable group Liberty Global.
That move by Liberty, which is in 12 European countries and
has recently invested in a small content producer, also shows
why the Sky assets may need to join forces in the region if they
are going to be competing against ever larger groups.
If the price is between 7 billion and 10 billion euros,
BSkyB's net debt could rise to more than three times its core
earnings from the current level of around one. That in turn
could force it to temper its share buyback and dividend
Analysts at Nomura warned that that could also leave BSkyB
vulnerable in its fight with BT when it comes to bidding for
Premier League soccer rights.
The two, which spent more than 3 billion pounds in 2012 to
share the rights for three years, are likely to go head to head
again in the auction for the three seasons beginning with the
Were BSkyB to push ahead with the European deal, it would
need to strike the right balance between investing in Britain to
ward off BT while growing its two new assets in Europe.
"BSkyB has always been a company with a great history of
innovation and bold risk taking," Numis analyst Paul Richards
said. "The challenges within the two assets are both a drawback
and an opportunity."
(Additional reporting by Sophie Sassard; Writing by Kate
Holton; Editing by Will Waterman)