News Corp seeks to reel in BSkyB, rebuffed for now

Rupert Murdoch’s News Corporation is proposing to pay $12 billion to take control of British satellite broadcaster BSkyB as it seeks to generate steadier earnings and make better use of its cash pile.

 

But BSkyB, founded more than 20 years ago by Murdoch and still chaired by his son James, demanded a higher offer on Tuesday for the 61% of BSkyB that News Corp does not already own.

 

News Corp proposed to pay 700 pence per share for BSkyB, which dominates Britain’s pay-TV market thanks mainly to top sports offerings representing a 17% premium to Monday’s closing price.

 

But BSkyB's independent directors unanimously rejected the bid as too low. They said they would be prepared to support an offer of above 800 pence per share.

 

Shares in BSkyB leapt as much as 22%, their biggest single-day jump for a decade, and by 1221 GMT were up 19.7% at 719 pence on expectations a deal is likely.

 

At 700 pence, News Corp which has $8.2 billion in cash and equivalents would be paying $11.6 billion for the 61% of BSkyB it does not already own.

 

Murdoch said on News Corp's earnings call last month the media conglomerate’s balance sheet was inefficient and he was considering uses of its cash pile including dividends, buybacks and debt repayments as well as investments in the business.

 

James Murdoch, who runs News Corp's European and Asian operations, has said pay TV in Western Europe is a top priority.

 

News Corp which includes the Fox television network, Movie Company 20th Century Fox and the Wall Street Journal also owns 45% of German pay-TV broadcaster Sky Deutschland, whose shares rose 9.6%.

 

BSkyB's premium sports offerings include Premier League soccer, the Ashes Test cricket series and the Tri Nations rugby championship.

 

It will become the first TV company in Britain to broadcast in 3D later this year, after pioneering HDTV.

 

The recent slide of Britain’s pound sterling, combined with the ending of significant investments by BSkyB in broadband and high-definition technology, make this an opportune time for News Corp to make its move, analysts argue.

 

London brokerage Numis said it expected a deal at between 700 and 800 pence, and raised its target price to 800 pence.

 

"News Corp is in robust financial health while the BSkyB valuation does not fully reflect its medium-term growth potential.

 

Combined with the current weakness of sterling, we can certainly see the attractions of a bid," its analysts wrote.

 

Disciplined approach

 News Corp said outright ownership would make the value of its decades-old investment more transparent to its shareholders, as well as increasing its geographical diversification.

 

The company said its offer valued BSkyB at 11.8 times 2010 earnings before interest, tax, depreciation and amortisation (EBITDA) significantly more than the average multiple of seven for European pay TV firms and six for US counterparts.

 

It said it would finance the acquisition if it went ahead through a combination of cash and debt. Ratings agency Standard & Poor’s said the proposed deal would not change its BBB rating and stable outlook for News Corp.

 

News Corp makes more than half of its revenues outside the United States. Consolidating BSkyB would also fit with its strategy of cutting its dependence on advertising.

 

Rupert Murdoch has championed the cause of forcing consumers to start paying for news online, and last month News Corp's British newspaper wing launched paid-for websites for its Times of London and Sunday Times papers.

 

News Corp's ownership of those newspapers and also Britain’s most popular daily tabloid, The Sun, could present regulatory obstacles to buying all of BSkyB, despite a new right-leaning UK government that is expected to be more sympathetic to BSkyB.                                            

BSkyB said it would work with News Corp to seek clearances from the relevant authorities.

 

News Corp and BSkyB left the door open for friendly talks that could run until February 2012, and said any deal would have to be approved by shareholders of 70% of BSkyB's stock.

 

Under the terms of the negotiations, News Corp agreed not to trigger a hostile approach by buying additional shares in BSkyB until two months after a deal receives regulatory clearance or after the end of 2011.

 

Should it want to break the terms, it would have to pay a fee of 38.5 million pounds.

 

BSKyB is being advised by Morgan Stanley and UBS, while News Corp is advised by Deutsche Bank and J.P. Morgan Cazenove