Analyst: Italian Pay TV Battle With Mediaset to Remain Drag on News Corp. Earnings

1:53 AM PST 11/23/2012 by Eric J. Lyman

Sanford C. Bernstein sees Silvio Berlusconi's Mediaset Premium as a spoiler for the business of Rupert Murdoch's Sky Italia.

ROME – The Italian  pay television sector is shaping up to be a key battleground going forward, according to a research note released this week by Sanford C. Bernstein analysts who said the sector was on pace to show slight growth this year after contracting in 2011.

Italy’s pay TV sector is notable because it pits companies owned by two of the world’s richest media tycoons against each other: Mediaset’s Silvio Berlusconi and Rupert Murdoch from News Corp., which owns Italian satellite broadcaster Sky Italia. Italian state broadcaster RAI and Telecom Italia Media’s La7 are both players in the free-to-air television sector, but they are not factors in the for-pay sectors.

Sky Italia remains the dominant player in the for-pay television sector in Italy, briefly surpassing 5 million subscribers last year and on pace to finish 2012 just under that level, Bernstein said. Mediaset Premium, in contrast, should end the year with 3.8 million subscribers. The two companies have both grown only marginally over the past two years, with predictions for this year up only 1.5 percent and 0.7 percent, respectively.

And is interesting to note that while Sky Italia is a “drag on earnings” for parent company News Corp., and while struggling Mediaset – which also runs three national free-to-air networks, cinema production and distribution house Medusa, advertising, and print media - is not likely to find salvation in Mediaset Premium, the sector is seen as a key battleground in the future.

The sector is set to grow around 3.3 percent this year, despite an overall decline in the television sector. Bernstein says that Sky Italia sees itself as poised to grow when the Italian economy begins its recovery after the economic crisis, while Mediaset Premium’s role, according to Bernstein, is important for the “strategic damage” it inflicts on Sky Italia, noting that the company’s “spoiler” role was no doubt a factor in Sky-Italia’s falling far short of the consensus prognostication from 2006 that the company would reach 6 million subscribers by 2010.

Bernstein is not particularly bullish on either company’s near-term prospects: it rates both Mediaset and News Corp. as “market perform,” and its target price for Mediaset shares, €1.20 ($1.52), is actually below Thursday’s close of €1.31 ($1.66), a price reached after four consecutive days of increases.

Other analysts are mixed on Mediaset’s prospects: research firm AlpaValue released a Thursday research note with a  €2.00 ($2.54) target price, more than 50 percent above the latest close, while Mediobanca, Societe Generale, and Banca IMI all released notes this week calling Mediaset as a “sell.”

Despite Italy’s economic malaise, Sky Italia has continued to invest in new product offerings, announcing a new channel that focuses on art in late October. Mediaset, meanwhile, has been looking to unload assets in order to raise cash, selling its Medusa Home Video subsidiary to Warner Bros. Italia last month and reportedly shopping its stake in The Space Cinema, a top exhibitor chain controlled by clothing maker Benetton.  

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