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 BSkyB, in which Murdoch's 21st Century Fox is also the largest
shareholder, will pay for the deal using cash, debt, its stake in a
TV channel and a placing of shares that represents around 10 percent
of its issued share capital.
The deal adds to a flurry of consolidation in the global media
sector and Fox is expected to use the proceeds to fuel its pursuit
of Time Warner <TWX.N>, which recently rejected Fox's initial $80
billion bid.
BSkyB had flagged a possible deal for Sky Deutschland and Sky Italia
in May. The price announced on Friday was slightly lower than
expected by some analysts and the cost and revenue benefits laid out
by BSkyB were greater than anticipated.
BSkyB's shares still fell 3.4 percent, pulled lower by the plan to
issue stock and suspend a share buy-back.
"It is a bit of a step in the unknown for Sky," said Conor O'Shea,
an analyst at Kepler Capital Markets. "For the first time, it will
go from UK-focused to European and be asked to prove that it can add
value from being larger."
O'Shea has a "buy" rating on BSkyB shares.
Facing the toughest market conditions in its 25-year history, BSkyB
has decided its future growth lies in creating a European pay-TV
leader that will operate in Britain, Ireland, Germany, Austria and
Italy.
BSkyB dominates British pay-TV, offering its premium sports, movies
and U.S. drama programming to more than 10 million homes. It hopes
to apply the formula in Italy and Germany, where pay-TV is not yet
as popular or as profitable.
Of 97 million households in its markets, 66 million are yet to take
pay-TV.
"Sky is clearly taking the strategic view that Pay TV, already
ingrained in the U.S. culture, will become prevalent in Europe,"
said Richard Hunter, Head of Equities at Hargreaves Lansdown.
Fox owns 100 percent of Sky Italia, 57 percent of Sky Deutschland
and 39 percent of BSkyB. BSkyB said it would pay 2.45 billion pounds
($4.2 billion) for Sky Italia and 2.9 billion pounds for Fox's 57
percent stake in Sky Deutschland.
The payment to Fox for Sky Italia will be made up of cash and
BSkyB's 21 percent stake in the National Geographic Channel, valued
at around 382 million pounds.
Fox said it would subscribe to the share issue to keep its stake in
BSkyB stable, meaning it will take net proceeds from the deal of
around $7.2 billion.
BIG ASPIRATIONS
BSkyB is betting it can squeeze out costs on everything from set-top
boxes to broadcasting rights via the expansion. It aimed to reap 200
million pounds of annual cost savings by the end of the second
financial year after the deal is completed and pledged further
savings later.
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The deal is not without risks, however, and it could take a while
for the creation of a "Sky Europe" to pay off.
Sky Italia, Italy's biggest pay-TV operator, has lost 220,000
customers since its peak in 2011 as the country's prolonged economic
downturn led more people to ditch their monthly TV packages.
In Germany, Sky Deutschland is growing strongly in terms of customer
additions and revenue, helped by the appeal of its domestic and
European soccer matches, but the percentage of those willing to pay
for TV in Germany remains low - below 20 percent.
And in Britain, BSkyB is facing tough competition from telecoms
group BT, which is spending heavily to buy rights and lure
customers.
The deal also requires sacrifices of BSkyB and its shareholders.
The company's credit rating is likely to be downgraded. It pledged
to bring its debt ratio back down "in the medium-term" to two times
earnings before interest, tax, depreciation, and amortization (EBITDA).
As a result, the group said it would not resume share buybacks or do
any further acquisitions until its leverage target was achieved.
Under German takeover law, BSkyB will have to make an offer for the
rest of Sky Deutschland. The offer will be at 6.75 euros per share,
compared to the 6.66 euros Sky Deutschland closed at on Thursday.
CFO Andrew Griffith told reporters the group's net debt to core
earnings would be below 3 times if the German minorities do not take
up the offer, and that it would be around 4 times if the German
minorities did take up the offer.
Analysts said that given the limited premium, they expected few Sky
Deutschland shareholders to tender their stock.
(Reporting by Kate Holton; editing by Paul Sandle and Tom Pfeiffer)
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