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James Murdoch has either pulled off a strategic coup worthy of his father, Rupert, or he has laid his company open to a vicious battle with rivals, regulators and shareholders with potentially dangerous consequences.
British Sky Broadcasting’s sudden swoop on ITV left many executives in the industry gasping with shock, admiration or confusion.
But it also set rivals running to their lawyers, and threatening a fierce fight.
There was more consensus about BSkyB’s motives.
“My first instinct is that it’s a spoiler,” says Theresa Wise, media partner with Accenture.
BSkyB struck eight days after NTL, its largest pay-television rival, made a £5bn-plus bid approach to ITV, a deal that – while fraught with complications – would have united his two biggest rivals and given them a distinctive line-up of media outlets and programming content.
At the same time RTL, Europe’s largest broadcaster, was finalising plans for a private equity-backed bid of its own.
BSkyB’s 17.9 per cent stake in ITV, which it may take up to the 19.9 per cent maximum it is allowed by the 2003 Communications Act, is large enough to block either deal. “This is a classic Murdoch manoeuvre,” says Mathew Horsman, managing director of Mediatique, a consultancy. “It might be expensive but it does bring Sky to the table in the evolving ITV situation and pre-empts NTL’s efforts to do a transforming deal.”
Several analysts drew parallels with Rupert Murdoch’s recent decision to purchase 7.5 per cent of John Fairfax, a close rival to News Corporation, BSkyB’s largest shareholder, in the Australian media industry. The stake will effectively make News Corp a kingmaker in the long-awaited shake-up of the Australian media sector.
James Murdoch’s own explanation was that the stake is a long-term financial investment, which “reflects our belief ITV’s decline has been overstated”.
Ms Wise agrees that, given the market’s pessimism about ITV and the possibility that regulators might loosen regulatory restraints on its advertising revenues, “it doesn’t get better than this in terms of buying ITV”.
Several analysts questioned whether BSkyB would hold the investment for long, however, saying it could instead be a way to get 100 per cent control of another broadcaster, Five.
The channel is owned by RTL but would have to be sold should RTL succeed in buying ITV.
“What Sky could do is to prevent NTL from buying ITV and let RTL buy the company,” says Guy Di Piazza, media specialist at Ernst & Young. “Then it could swap its stake for Channel Five.”
NTL’s US-listed shares rose 5 per cent on the news, reversing recent losses, as shareholders gambled that a deal that would double NTL’s debts was less likely.
People close to both NTL and RTL made clear, however, that they believed their deals were far from dead.
On Wednesday, at the sun-drenched Hotel Arts in Barcelona, James Murdoch told investors at a Morgan Stanley conference that he did not see NTL’s approach to ITV as much of an issue.
If that were the case, one analyst asked yesterday, “was this really necessary?”
Jeremy Darroch, BSkyB’s chief financial officer, says yesterday’s move will cost the company no more
than £10m in financing charges this financial year and £13m the next, while leaving it well within its covenants.
Investors had thought the cash was reserved for BSkyB’s roll-out of broadband services, however, and may want a fuller explanation of its decision to park it in a minority investment in a company dependent on the advertising cycle.
James Murdoch has several battles to win yet but if he does take after his father, he will enjoy the fight.
Additional reporting by Aline van Duyn in New York