By Ian Walker and Caitlan Reeg
British Sky Broadcasting Group PLC said Monday it is in
preliminary discussions with 21st Century Fox Inc. over a
multibillion-dollar acquisition of its pay-TV assets in Germany and
Italy.
In the possible reshuffle of media mogul Rupert Murdoch's
broadcasting business in Europe, the U.K. company would be taking
part in the recent accelerated consolidation of Europe's cable,
television and telecom sectors. Industry executives are looking for
cross-border heft in buying rights to show sports and
entertainment, and in developing content of their own.
The deal would involve the British company buying 21st Century
Fox's 57% stake in Sky Deutschland AG, an investment worth about
EUR3.2 billion ($4.4 billion) based on the company's closing share
price Friday. BSkyB would then launch a mandatory takeover offer
for the rest.
BSkyB, which itself has a market capitalization of around
GBP13.6 billion ($22.9 billion), added that the mandatory offer
would be made without a premium. Sky Deutschland shares
nevertheless rose early Monday, up as much as 7.2% in early trading
in Frankfurt.
The British company would also acquire Sky Italia, a major
sports broadcaster in Italy, which is wholly owned by 21st Century
Fox.
BSkyB itself is 39%-owned by 21st Century Fox, which until June
was part of the same company as Wall Street Journal parent News
Corp. The original News Corp. in 2011 abandoned a planned bid for
the rest of BSkyB amid a furor over reporting practices at one of
News Corp.'s U.K. newspapers.
The combined European broadcasting group would have around 20
million subscribers, adding Sky Italia's five million and Sky
Deutschland's 3.7 million to BSkyB's 10.5 million television
customers, according to the companies' websites.
"These discussions haven't progressed beyond a preliminary
stage, no agreement has been reached on terms, value or transaction
structure and there is no certainty that a transaction will occur,"
BSkyB said.
Odey Asset Management LLP--the second-largest holder of Sky
Deutschland shares, with an 8% stake--reacted negatively to the
proposal Monday. The firm said the lack of a premium for minority
holders "significantly understates the value of the company."
Tough antitrust scrutiny in the U.K. and Europe is likely to
follow should BSkyB pull off the deal. British regulatory
authorities, including media watchdog Ofcom, and the government are
particularly leery about concentration of ownership in the
country's media sector, where Mr. Murdoch, controlling shareholder
of both 21st Century Fox and News Corp, has long had a major
presence through his investments in television and newspapers like
the Times and the Sun.
A person familiar with the matter said that 21st Century Fox
doesn't intend for any transaction to increase its stake in BSkyB
beyond its current 39%. Ofcom declined to comment Monday.
To address possible conflicts of interest in the current deal
negotiations, BSkyB said all board discussion of the issue is
solely within a committee composed of its independent directors,
which doesn't include directors affiliated with 21st Century
Fox.
"Over the years we've had numerous internal discussions
regarding the organizational and ownership structure of the
European Sky-branded satellite platforms. From time to time these
conversations have included BSkyB, however no agreement between the
parties has ever been reached," the company said.
21st Century Fox also confirmed the talks in a separate
statement. Sky Deutschland had no comment.
Some analysts were skeptical about the likelihood of the deal
going through and the merits of it for BSkyB shareholders.
"[It] would be an expensive deal," said analysts at J.P. Morgan.
"We don't see substantial synergies and it wouldn't enhance BSkyB's
cash-flow capacity short-term," they said in a research note.
The enlarged pay-TV operator would achieve modest savings in
product development and greater leverage in bidding for sports and
movie rights, and have deep pockets for developing for original
content, analysts at Credit Suisse said.
But the combined company would have promising growth only in
Germany, which has relatively low level of pay-television
penetration, as its subscriber base in Italy has shrunk since
2011.
The BSkyB approach to its German and Italian sister broadcasters
follows a number of recent deals in the European broadcast-media
sector.
Liberty Global PLC, the cable operator majority-owned by U.S.
media magnate John Malone, has made a EUR6.9 billion acquisition of
Dutch cable operator Ziggo NV, subject to approval by the EU's
competition regulator, which is investigating the deal. Liberty
Global has snapped up a dozen cable operators in Europe in the past
year. Earlier this month, the cable company and U.S. cable firm
Discovery Communications Inc. teamed up to buy independent U.K.
television producer All3Media for GBP550 million.
Viacom Inc., controlled by Sumner Redstone, announced in early
May that it would acquire British broadcaster Channel 5
Broadcasting Ltd. for GBP450 million as the U.S. media company
seeks to build its audience in the U.K.
Nicholas Winning contributed to this article.
Write to Ian Walker at ian.walker@wsj.com and Caitlan Reeg at
caitlan.reeg@wsj.com
Subscribe to WSJ: http://online.wsj.com?mod=djnwires