UPDATE 1-BSkyB sees profit hit if no deal with Virgin Media

(Adds details, quotes, reaction)

LONDON, Feb 26 (Reuters) - Pay TV firm BSkyB (BSY.L) said on Monday its annual operating profit would take a hit of up to 20 million pounds ($39 million) if it failed to reach a deal for its basic channels to be shown on rival Virgin Media (VMED.O).

James Murdoch's BSkyB and Virgin Media, the new company born of the merger of NTL, Telewest and Virgin's mobile phone division, have been locked in negotiations to secure a new deal, with both sides increasingly accusing the other of foul play.

Relations between the two companies hit a new low last week with Virgin accusing its rival of suppressing competition over the carriage deal which expires on Feb. 28.

BSkyB said in a statement on Monday that there was now a real possibility that agreement would not be reached.

"The company estimates that the financial impact on Sky, were an agreement not to be concluded in relation to the remainder of the year to 30 June 2007, would be a reduction of 15 million pounds to 20 million pounds million of operating profit," BSkyB said in a statement.

The two companies are rivals in Britain's highly competitive pay-TV, broadband and phone markets, where content can often be a crucial factor for potential customers.

BSkyB's Chief Financial Officer Jeremy Darroch said Sky had increased investment in its basic channels which include Sky One, Sky News and Sky Sports News, by 68 percent over the last five years and were simply after a fair price.

"We are disappointed that Virgin Media appear to have walked away from negotiations," Darroch said. "With three days still to go before the deadline, we hope that Virgin Media will focus on getting a deal done rather than on their PR offensive."

Sky's sports and movie channels will not be affected.

Virgin Media, which has accused BSkyB of asking for more than double the existing arrangement, said on Friday it believed Sky had deliberately engineered the situation to coerce Virgin's customers to switch to its service.

Virgin is investing in its on-demand service and has said that Sky's channels, which show such programmes as "Lost" and "24", were becoming less popular in Virgin Media homes.

BSkyB said on Monday its estimate of 20 million pounds reflected the impact of lower carriage fees and lower advertising revenues but did not include the future benefits of increased customer growth if cable customers decided to switch to Sky.

A spokeswoman for Virgin said they were still open to talks but would only pay out based on the channels' popularity and not how much has been spent on them.

"This is simply part of a scheme by Sky to deprive consumers of choice," the spokeswoman said. The two sides publicly clashed last year when BSkyB bought a 17.9 percent stake in Britain's commercial broadcaster, ITV (ITV.L), effectively blocking the-then NTL's plans of buying the company.

James Healey, senior media analyst at Ernst & Young, said last week that although a group of hardcore followers may be swayed by the availability of shows such as "Lost", it was debatable how many customers took cable just for a handful of U.S. shows.

(additional reporting by Mark Potter)

((Reporting by Kate Holton, Editing by David Cowell;

Reuters Messaging: rm://mark.potter.reuters.com@reuters.net

Tel: +44 20 7542 7717, Fax: +44 20 7542 9025))

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