Australia's Foxtel Bids $2 Billion for Rival Austar

Consolidation continues in Australia's pay-tv sector as Foxtel prepares to take on free TV.

SYDNEY -- Australia's biggest pay-tv firm, Foxtel, has made a $2 billion takeover bid for rival Austar in a deal aimed at reviving subscriber growth and taking on competition from free-to-air television stations.

The latest deal in Australia's rapidly-consolidating media sector came after Austar's biggest shareholder, John Malone's US-cable group Liberty Global, agreed to back the cash offer after years of negotiations with Foxtel.

The bid took time to negotiate because it had to be cleared by Foxtel's three other high-profile shareholders -- telecoms firm Telstra, Rupert Murdoch's News Corp. and billionaire James Packer's Consolidated Media Holdings.

Analysts said a rising Australian dollar helped convince Liberty on the deal's merits because the company could realize $1.1 billion from a successful sale. The Australian dollar has risen about 5 percent since early March to trade around 1.06 against the dollar, but has given up some of its gains since hitting a 29-year peak above 1.10 earlier this month.

Foxtel made a conditional cash offer of A$1.52 ($1.61) per share for Austar, a 20.6 percent premium to its last close, to create one of Australia's biggest media companies with forecast annual revenues of more than A$2.8 billion ($2.9 billion) and combined subscriber numbers of 2.5 million.

Australia's Competition and Consumer Commission (ACCC) said it was reviewing the transaction, a spokesman said. Interested parties have until June 16 to file submissions.

Foxtel's main audiences are in metropolitan areas, while Austar focuses on regional markets.

Foxtel's chief executive, Kim Williams, said the deal would allow the combined group to cut costs and compete better against free-to-air television networks that have been launching new digital channels and hurting the pay-TV industry.

"Clearly the free-to-airs have had a lot of free kicks and they get huge support from the federal government," Williams told Reuters in an interview. "We don't seek support and think it's wrong they continue to be so protected and subsidized."

The combination would enable Foxtel to compete more effectively and invest more, he added, forecasting annual operational expense savings of A$50 million to a$60 million.

Foxtel has been talking to Malone, a 70-year-old cable TV pioneer, on and off for several years in an effort to secure a successful bid for Austar, according to sources and local media reports. Malone, who owns stakes in shopping channel QVC and DirecTV Group, was dubbed "Darth Vader" by former U.S. Vice President Al Gore due to his reputation as a ruthless businessman.

The deal means virtually all of Australia's television industry is involved in some form of ownership change or management shake-up, although a recent slump in advertising revenue has delayed private equity plans to list Nine Entertainment Co.

Talk of Foxtel lining up a bid for Austar adds to a shake-up in the sector after West Australian Newspaper Holdings' $2 billion bid for Seven Media Group, and Southern Cross Media's A$741 million bid for radio group Austereo.

Telstra owns 50 percent of Foxtel, while News Corp and Consolidated Media each have 25 percent. Consolidated Media is owned by Australian media moguls Packer and Kerry Stokes.

Austar said in a statement its board and representatives from Liberty, which owns 54 percent, believe the value of the A$1.52 per share cash offer was appropriate.

Analysts said while the deal might not significantly reduce competition, Foxtel may have to make some concessions to receive ACCC approval.

"We see some risk that the ACCC may use the Austar bid as an opportunity to try to get Foxtel to provide some of its content on a wholesale basis to third-party providers, which may not be acceptable to Foxtel," RBS analyst Fraser McLeish said.

Williams said he did not expect any major competition issues, pointing out that the only market where the two companies had a crossover was Australia's Gold Coast, which makes up about 2 percent of the market.

Austar shares surged in early April when bid talk first emerged. Austar said on May 18 that Foxtel remained in talks with Liberty although no firm bid had been made.

Sources told Reuters last month Foxtel was seeking to raise about A$1.2 billion in debt to fund a deal. Foxtel said Thursday the deal would be funded through a combination of bank debt and capital contributions from its shareholders.

UBS is advising Foxtel on the deal. Austar appointed Goldman Sachs to advise on the offer. Telstra is being advised by Credit Suisse.