European mergers building a media giant

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CANNES -- As European TV execs wheel and deal at MIPTV, there's an elephant in the room that everyone is thinking about but few are discussing openly: the upcoming merger of pan-European media group SBS Broadcasting with leading German commercial broadcaster ProSiebenSat.1.

The deal, expected to go through by summer, will create a new giant on the European TV scene. A merged ProSiebenSat.1-SBS will be Europe's second-largest broadcaster and the only company capable of taking on the No. 1: Bertelsmann-controlled RTL Group.

Add to that another megamerger -- the fusion of All3Media, the U.K.'s leading independent TV production company, with MME Moviement, one of Germany's top production houses, and the true dimensions of the ProSieben-SBS deal take shape. ProSiebenSat.1 and SBS are both controlled by equity group Permira and KKR. Permira also owns All3Media and was behind its bid for MME.

"Taken together, the assets of all these companies add up to a real TV giant," said a leading executive with one of Germany's public broadcasters. "If they could be vertically integrated, it would be a real force in Europe. But that's a big if."

The prospect of adding SBS' pay, free and radio assets to ProSiebenSat.1 (which controls about 30% of Germany's free-TV market) could, in theory, drive a horizontally integrated business capable of delivering cross-market advertising sales, cross-platform program promotion and multiple revenue streams.

The addition of All3Media/MME also could provide a flow of exclusive top-tier programming lacking from SBS' distribution platforms.

MME CEO Martin Hoffmann believes the merger with All3Media also will result in "major synergies" and economies of scale that will allow the production companies to develop standout formats that can cross borders. It is such global formats as "American Idol" or "Big Brother" that have driven the success of European production giants Fremantle Media and Endemol, respectively.

"The amount of investment needed to produce successful formats now is such that bigger companies with sufficient resources are much better positioned to deliver the kind of quality needed to produce these kinds of (global) shows," Hoffmann said.

But while the aggregation of pay, free-TV and radio assets with a production base is an interesting model, a merged ProSieben-SBS will have a ways to go before it can match the scale of its nearest competitors, rivals said.

"It's not just a question of having production and distribution potential, it's a question of building a network that will allow you to launch a show across multiple territories," a senior Fremantle insider said. "That's what we (Fremantle Media) have spent so long doing. It takes time and it isn't easy to achieve."

Financial sources also query the strategic rationale of the deal, suggesting it has "defensive" elements.

"If you look across countries, it is questionable how much you get in terms of synergies. Do you really get them from owning assets in different markets?" one London-based M&A specialist asked.

"You can argue on vertical integration that you have programming that you can market the hell out of on your own networks, but that only works if you have the best programming. If the programming doesn't work, it doesn't matter what kind of distribution you get."
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