Sky Deutschland shares plunge on Q2 figures

News Corp. backs new $450 million credit facility

COLOGNE, Germany -- Shares in News Corp's German pay TV operation Sky Deutschland took a nosedive Tuesday after the company announced it would not break even next year as planned and that it needs $450 million (€340 million) in new cash to keep the lights on.

Sky shares lost nearly a quarter of the value Tuesday, falling nearly 25% in the first hour of trading, before recovering slightly. By mid-morning, Sky Deutschland stock was still down more than 20% at €1.11 ($1.47).

The drop followed news that Sky lost $63 million (€47.4 million) in the second quarter of this year while revenue, at $312 million (€236.1 million) barely moved. CEO Brian Sullivan said full year figures would be worse than expected and Sky would still be printing red ink next year, missing its target of an operating break even by 2011.

The German pay TV service added a mere 6,000 subscribers in Q2, despite launching a catalogue of new services -- including PVR and HD offerings and a iPad sports app, which allows subscribers to watch all of Sky's live sports on the go. Sky was the only German broadcaster to carry all 64 matches of the soccer World Cup but even that didn't translate into many new customers.

Saying he was "not satisfied with the pace of development," Sky CEO Brain Sullivan announced plans to raise at least $450 million in new cash through a rights issue possible combined with a convertible bond and/or shareholder loan. News Corp, with a 45.42% stake Sky Deutschland's largest shareholder, will backstop the new capital measure, expected for September/October. News Corp. however, will maintain its minority position at Sky Deutschland. Its stake in the German company will not go above 49.9%, the company said.

"I am confident this will allow us to achieve the necessary momentum to build a sustainable business for the future," Sullivan said, adding Sky's focus will be to juice subscriber growth and the average revenue per user (APRU) it earns per customer.

Sullivan can point to some positive developments. APRU figures were stronger in Q2 and Sky's churn rate -- the percentage of new customers that cancel their subscriptions -- was down to 16%, the lowest it's been in four years. Subscriber revenue is up, program costs are down and penetration of Sky's premium HD service has nearly doubled year-on-year to 15%.

But German pay TV remains a money pit for News Corp. Net debt stands at $336 million (€253.9 million), $120 million more than this time last year.

The new capital issue is evidence the conglomerate and boss Rupert Murdoch remains committed to making Sky Deutschland work. The markets, however, are less patient and will continue to punish Sullivan if he doesn't soon show real progress.