James Murdoch Shows He Is His Father’s Son, Buying 17.9% Of ITV To Spoil A Possible Deal With RTL or NTL, Just As His Father Bought A 7.5% Stake In Australia’s Fairfax Newspapers To Ruin Any Possible Buyout There

Philip Stone November 18, 2006

James Murdoch, son of Rupert, showed over the weekend how his father’s blood runs through his veins, shocking the British television establishment as his BSkyB, the country’s main satellite TV operator, bought a 17.9% share in ITV, the country’s top commercial terrestrial network, basically putting an end to any ITV buyout ideas by RTL or NTL.
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James Murdoch insists his purchase was not a “spoiler” to stop others gobbling up ITV, his prime competitor, and strengthening the channel that currently is in the dumps with advertising at an all-time low, but you’d be hard-pressed to find anyone who believes him.

The deal cost £940 million (€1.39 billion, $1.78 billion), and even for News Corp that owns 39% of Sky that is far more than petty cash. It could not have gone ahead without the approval of Sky’s chairman – one Rupert Murdoch -- but that is exactly the kind of strategy the older Murdoch loves to play – indeed he said as much earlier in the week in explaining News Corp’s 7.5% purchase in Australia of rival Fairfax Newspapers as a way of spoiling any ideas other competitors had of buying up that newspaper group.

But the Sky deal, seen basically by financial analysts as really quite brilliant in protecting the Sky franchise even if it cost so much, raises all sorts of questions about just how powerful the Murdoch empire is becoming in the UK.

News Corp owns the largest daily circulation newspaper (the tabloid Sun at 3.1 million) and the largest circulation Sunday paper (News of the World, 3.4 million) and the largest Sunday quality newspaper (Sunday Times at just under 1.3 million) and the prestigious Times (656,000), in addition to controlling Sky. Now the company holds 17.9% of the main commercial channel.

That kind of journalistic power translates very easily in the UK to political power. It is often thought that getting the backing of The Sun in general elections can often swing who is the next prime minister. Tony Blair is often participating in News Corp. functions (Pebble Beach, California in person in July, participating by satellite link with a Tokyo conference partly sponsored by The Times this month). Downing Street has been very shy in releasing under the Freedom of Information Act how many times Tony Blair and Murdoch speak on the telephone, and there is speculation that once Blair gives up the premiership next year that he will soon find himself invited to join the News Corp. board.

Under current UK law the Murdochs have done nothing wrong legally. By buying just 17.9% of ITV, even if it increases that by another 2% which is a possibility, it still stays under the 20% limit imposed by the 2003 Communications Act.

In buying the 696 million shares at 135 pence each, Sky paid a 17% premium over Friday’s closing price of 115.75 pence, and that price had risen some 10 pence during the week as investors thought there might be a NTL or RTL tie-up with ITV. The buy does not stop others from offering a similar or even better premium, but such a buyer now knows beforehand  that close to 20% of the shares will vote no on any such deal, and it will therefore be a hard slog to get the necessary approval.

There can be no doubt that the investment companies that own the bulk of ITV’s shares have not been happy for some time. Formed three years ago by the merger of Carlton and Granada, ITV floated on the stock market at 148 pence. Its board had turned down a 130 pence bid earlier in the year and since then the shares had sunk to under £1, so for the lucky two funds said to have sold the shares the 135 pence, while not even the float price, was an opportunity not to be lost in getting out of a losing proposition.

So basically Sky paid about a 30% premium over where the shares sat a couple of weeks back. Why didn’t it make its buy when the shares were far cheaper?

ITV’s weakness suited Sky perfectly. But when NTL, the UK’s cable powerhouse, snorted a couple of weeks back that it was interested in doing a friendly ITV deal worth around £5 billion then that really put the hare among the hounds in the Sky executive suite.

Sky had already let one big competitor slip under its radar -- the Freeview digital service that provides free, terrestrial advertising-supported television received by a cheap desktop box. It has been a huge success and has had a major effect on slowing Sky’s growth numbers.

Cable has really never been a major UK threat, but suddenly here was the largest cable player saying it wanted to start talks with the largest terrestrial TV network. Those synergies really worried Sky, and it couldn’t take a chance of another Freeview misstep. 

Apart from the cross-promotion value between cable and terrestrial services, (the ITV digital channels on Freeview are showing surprising strength)  the NTL/ITV hookup could mean another bidder in the sports rights stakes that Sky nearly always wins and which has been the major reason for its great success. That sports franchise had to be protected at all costs, and by becoming the largest shareholder in ITV it means Sky would certainly have influence on any possible ITV sale to someone who could become a sports rights competitor.

And then there was also talk of Bertelsmann’s RTL, Europe’s largest television operator with 34 television stations in 11 countries (it already owns the Uk’s Channel 5) also being interested. ITV is generally thought to have rather poor management, whereas RTL’s is probably the best in the business. With serious money behind RTL, it too could have become a serious UK player and have gotten involved in that sports bidding.

Far easier and neater, even if at a big premium, for Sky to take care of the problem up-front and basically make it hardly practical for any of those deals to now go forward. Even though it has become ITV’s largest shareholder Sky says it will not seek a seat on the ITV board. In other words, let them continue to do what they do and we’ll carry on doing what we do.

Sky probably has no problem if ITV on its own resurrects itself, becomes a stronger terrestrial player, keeps out of the major sports bidding and if all goes well maybe in a few years make money off its investment.

For the moment the real winners are those private equity firms that sold their holdings after the stock market closed Friday. They played hardball, first being offered 128 pence and saying no, but then accepting 135 pence.  Now that there is very little prospect for an ITV total buyout look for its share price to take a real nosedive Monday.

As for NTL, all of this may be a blessing in disguise. It is still digesting its buyout of Virgin Mobile – it will soon revert to using the Virgin name – and with some £6 billion of debt already on its books there could well be an argument to be made that it spend its management time on what it has already, instead of stretching itself trying to fix ITV.

The real loser here could be RTL. ITV would have been a magnificent fit into its stable, but it has been very slow to act even though ITV’s share price has been languishing for many months under £1. Bertelsmann’s attention has focused for much of this year on finding ways to payoff the €4.5 billion debt raised to finance the buyback of a 25 pct minority stake in its capital from Groupe Bruxelles Lambert, and so it said it wouldn’t really be in a buying mode until some time in 2007. There has been talk of RTL teaming up, in a minority partnership, with a couple of large private equity firms and offering around 130 pence a share for ITV.

Now all of that seems a golden lost opportunity, but the media landscape is changing so quickly these days with private equity firms taking a close interest that while the Sky purchase makes ITV a difficult sale to complete, that doesn’t mean it can’t be done if someone wants it bad enough.

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ITV Turns Down NTL’s 122 pence Bid As Too Low - November 21, 2006

BSkyB’s 17.9% purchase of ITV shares has already accomplished what it was intended to do – ITV on Tuesday rejected a 122 pence cash and shares bid from NTL as being too low.

And also as predicted, ITV is basically an orphan for whom it is going to be very difficult to complete a sale, and the share price accordingly has dived from the premium 135 pence that BSkyB paid to around 113 pence, its value before the BSkyB swoop.

NTL bid 105 pence in cash and some 17 pence additional in NTL shares.  Taking on NTL shares would be somewhat risky given the debt burden NTL already has – some £6 billion – plus the additional £4.7 billion that the ITV bid would cause and also, because NTL is listed on NASDAQ that in turn causes problems for those UK fund managers who are not allowed to hold US stocks in their portfolios.

What was interesting, however, is that NTL made the bid fully realizing that BSkyB had bought in at 135 pence and would probably do all it could as ITV’s leading shareholder in trying to stop the deal.

Britain’s Office of Communications (OFCOM) has said it is reviewing the BSkyB share purchase in ITV to see if its affects control of any licenses ITV has received from the government.

Most London analysts believe it would be very difficult for NTL or anyone else (RTL is also mentioned as a suitor) to gain control now over ITV unless they offer so much money that it is in everyone’s best interest to sell. And that means a price above 135p.

And there is also a general feeling that for the moment at least NTL, still digesting its Virgin Mobile purchase, is better off without ITV.