21st Century Fox, U.K.'s BSkyB Reach $9.1 Billion Euro Pay TV Deal

BSkyB CEO Jeremy Darroch Headshot - P 2012
Courtesy of BSkyB

BSkyB CEO Jeremy Darroch Headshot - P 2012

UPDATED: Rupert Murdoch's company will retain its 39 percent BSkyB stake, but raise billions for a possible new Time Warner bid, with the mogul vowing to put shareholder value first.

LONDON – Rupert Murdoch's 21st Century Fox and U.K. pay TV giant BSkyB made things official on Friday, unveiling a $9.1 billion European pay TV deal that has been in the works for months.

In May, the companies confirmed that they have had talks about the possible deal that will consolidate under BSkyB the European pay TV companies that Murdoch's entertainment company controls. 

Fox will retain its 39 percent stake in BSkyB, which will acquire Fox's 100 percent ownership of Sky Italia and roughly 57 percent stake in Sky Deutschland.

Fox said it will receive approximately $9.3 billion in value from BSkyB comprised of approximately $8.6 billion in cash and the National Geographic Channels International stake, which will raise Fox’s ownership stake in that business to 73 percent.

Fox said the after-tax proceeds will amount to $7.2 billion, which industry observers say the company could put towards a sweetened bid for Time Warner. 

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Shareholders have been wondering whether Fox could end buying back stock if it continues to go after Time Warner, but it promised Friday to continue the stock buybacks, with a new program set to be announced soon. The BSkyB deal will still strengthen Fox's cash war chest for a potential sweetened bid for Time Warner, which recently rejected an $80 billion Fox offer.

"Our renewed authorization for our share buyback program will be executed regardless of any potential acquisition or investment activity by the company," said Fox chairman and CEO Rupert Murdoch. "21st Century Fox’s number one priority is increasing shareholder value in a disciplined manner and, as a result, we will only consider transactions that fully support this objective." 

Fox spoke of $9.3 billion in value it will receive in the European pay TV deal. The figures in BSkyB's statement at Friday morning's foreign exchange rates, which constantly change, amounted to roughly $9.1 billion, including $4.9 billion (£2.9 billion) for Sky Deutschland and $4.2 billion (£2.45 billion) for Sky Italia.

The Sky Italia portion of the deal is paid for mostly in cash, with an additional $650 million (382 million pounds) in value coming in the form of the transfer to Fox of BSkyB's 21 percent in the National Geographic Channel International.

BSkyB is also offering nearly $9.1 (€6.75) per share to the remaining shareholders in Sky Deutschland, which would give it full ownership of the company. Depending on how many shareholders accept the deal, BSkyB said its total cash outlays in the deals could reach $11.9 billion (7 billion pounds).

The acquisitions will "bring benefits of scale, taking BSkyB from 11.5 million customers to 20 million," the company said. On an aggregated basis, group revenue will increase from $12.9 billion (£7.6 billion) for the standalone BSkyB to $19.0 billion (£11.2 billion).

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The transaction will make BSkyB, led by CEO Jeremy Darroch into a European satellite TV giant. The 20 million pay TV subscribers that Sky Europe, as people have dubbed the combined company, are below the number reached by John Malone's international cable operator Liberty Global, but the deal gives it increased scale to compete with it beyond a single country.

"Benefits from greater purchasing power, security in a future of pan-Euro rights distribution and best practice sharing are well rehearsed," Jefferies & Co. analyst Jerry Dellis recently said in a report. "But synergies could take several years to realize."

On a conference call, BSkyB management spoke of $340 million (200 million pounds) in synergies by the second year of the combination, mostly on the cost side of the business. More revenue synergies could come over time, with Darroch saying BSkyB's multi-product strategy and newer services, such as Sky Store and the Now TV broadband-only service, could make their way to Germany and Italy over time.

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Asked by THR about content synergies, Darroch said the larger company will be "a great partner for all content producers around world," but management was not assuming major savings in content costs. He signaled though that the three Sky companies would continue to develop content together, which will be even easier under the same company roof.

Dellis said that "the extent to which [synergies] crystallize within the BSkyB share price post-deal could be dictated by the longer-term ambitions of Fox." The company has left its options open.Fox could eventually sell its BSkyB stake or "Fox’s ultimate ambition might be to own Sky Europe in full," Dellis said.

"We have always believed that a combination of the European Skys would create enormous benefits for the combined business and for our shareholders," said James Murdoch, co-COO of Fox. "Ultimately, a pan-European Sky is good for customers, who will benefit from the accelerated technological innovation and enhanced customer experience made possible by a fully integrated business. The transaction underscores our focus at 21st Century Fox on simplifying our structure while delivering significant value to our shareholders."

He added: "We look forward to participating in Sky’s exciting next chapter under the leadership of Jeremy Darroch, along with the other senior leaders, colleagues and creative talent across all the European Sky businesses."

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Fox president and COO Chase Carey said: "For 21st Century Fox, this transaction was driven by the company’s objective of maximizing the value of its various Sky holdings in a manner that recognizes the fair value of these businesses while allowing us to participate in the ongoing benefits of Sky through our ownership interest in the enlarged and strengthened company. This transaction significantly enhances liquidity on our balance sheet to support our key operating principles, including the consistent return of capital to shareholders."

He added: "In this regard, for fiscal 2015 we will continue our share buyback program and will communicate the details of a renewed share buyback authorization upon the announcement of fiscal 2014 earnings results" on Aug. 6.

The BSkyB deals are expected to close in October or November, Darroch said Friday. BSkyB argued they would become "strongly" accretive after the second year.??

Email: Georg.Szalai@THR.com?
Twitter: @georgszalai