New Mediaset strategy targets pay channels

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In the start of what could prove to be a dramatic reorganization for Italy's Mediaset, the company controlled by former Prime Minister Silvio Berlusconi, said it would shift its model away from receiving revenue from advertising and confirmed speculation that it would make a bid for German broadcaster ProSiebenSat.1 (HR 11/4). A new strategy would be one based more on on-demand services and pay channels.

A slump in advertising income in Italy was behind the company's drop in revenue, and the trend seems set to continue as advertising sales in Italy remain soft. Additionally, Berlusconi's ouster from the prime minister's office in April resulted in less government-backed spending.

These are troubling days for Italy's largest private broadcaster. The company faces the prospect of government action to increase competition in the sector it controls along with state broadcaster RAI, and Berlusconi himself faces legal problems, including charges of corruption that will force him to appear in court next year.

 Late Tuesday, the company reported disappointing earnings for the first nine months of the year that came in more than 20% lower than over the same period in 2005.

But the company remains cash rich, and after the earnings report it reiterated plans to use its war chest to revamp its operations and to expand both organically and through acquisition.

The deal involving ProSiebenSat.1 is the most dramatic move under consideration, though Mediaset chairman Fedele Confalonieri cautioned that the company will produce a nonbinding offer that is in "an extremely preliminary stage."

The company did not release details of the bid, but it is known that if Mediaset indeed acquires control of ProSiebenSat.1, the combined company would unseat Bertelsmann's RTL Group as Europe's largest television group, with annual revenues of €5.7 billion ($7.2 billion) last year. The company would have a strong presence in three major European countries: Italy, Spain (where Mediaset owns the Telecinco network) and in Germany, where ProSiebenSat.1 controls about 20% of the overall television audience.

Italian regulators said earlier in the week that they would look into any plan for Mediaset to expand into Germany. And in Germany, the proposed plan raised hackles.

"My trust in Mediaset is very limited," said Rainer Wend, economic spokesman for Germany's Social Democratic party. "Although there is unfortunately no basis for opposition (to the deal) on cartel regulations, I would hope that another solution could be found."

Conservative politicians also expressed concern that Mediaset could prompt a "dumbing down" of German broadcasting.

"Even in the commercial television sphere there has to be a minimal level of high-quality and politically independent programming," said Wolfgang Boernsen, media spokesman for Germany's Christian Democratic Union.

The reorganization plan prompted similarly negative responses, with JP Morgan cutting estimates for Mediaset earnings for 2007 based on a continued slide in advertising earnings and insufficient evidence that a pay model will be adequate to make up the difference. Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar, said Italian banks will probably follow suit over the coming days.

"There is no doubt that there are going to be some increasingly difficult times for Mediaset," Noriega said in an interview.

Though the shift in business strategy seems to be a done deal, the acquisition of ProSiebenSat.1 is less certain.

According to sources close to the German broadcaster, several other suitors submitted nonbinding bids this week. The investment consortium headed by TV mogul Haim Saban, which controls 88% of ProSiebenSat.1's voting shares, is expected to draw up a short list of front-runners by early next week and begin concrete negotiations.

Two investment consortia have reportedly submitted bids for ProSiebenSat.1: Apax/Goldman Sachs and KKR/Permira. As with Mediaset, a successful bid by KKR/Permira would create a new pan-European TV powerhouse. The two investment funds already control SBS Broadcasting, which is a major player in Scandinavia, Benelux and Eastern Europe, with its 18 commercial and 21 pay TV channels.

Whichever company emerges as the front-runner for ProSiebenSat.1, it will have to shell out a lot more than the €23.37 ($29.68) per share offered last year by German publisher Axel Springer. Sources near the group put the asking price for the broadcaster at a minimum of €29 ($36.83), or a total of some €5 billion ($6.3 billion).

According to Confalonieri, it is possible that the asking price for ProSiebenSat.1 will make the deal unattractive despite Mediaset's deep pockets.

"We will only make an official offer if we believe the deal offers great potential value growth for all Mediaset shareholders," Confalonieri said.

Eric J. Lyman reported from Rome and Scott Roxborough from Cologne, Germany.
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