Fox Will Raise $9 Billion Cash By Selling Its Italian And German Pay-TV Business

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Twenty First Century Fox (NASDAQ:FOX) has agreed to sell its pay-TV business in Italy and Germany to British Sky Broadcasting Group (BSkyB) for more than $9 billion. [1] BSkyB is a satellite broadcasting, broadband and telephone services company with operations in the U.K. and Ireland. It is the largest pay-TV broadcaster in the U.K. and Ireland with over 10 million subscribers. The potential merger with Sky Deutschland and Sky Italia would give BSkyB access to a large subscriber base (around 20 million) in Europe, and it can bid for pan-European rights to media content including sports and television series.  21st Century Fox owns a 39% stake in BSkyB, 57% of Sky Deutschland and 100% of Sky Italia. This deal will significantly boost Fox’s cash balance and arm it for any fresh bid for Time Warner (NYSE:TWX). As part of the deal, BSkyB will also transfer its 21% stake in the international National Geographic channels to Fox, thereby raising Fox’s stake to 73%. [1]

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Why Is The Deal Important For Fox?

Direct Broadcast Satellite Television (DBS) segment of 21st Century Fox includes Sky Deutschland and Sky Italia pay-TV operations. DBS has been a low margin business for 21st Century Fox. The segment’s revenues have grown at an average annual rate of less than 2% up to 2012. [2] In 2013, Sky Deutschland was consolidated and this led to over 50% jump in DBS revenues. If we look at EBITDA margins, they have declined from 19% in 2008 to an estimated 9% in 2013. Moreover, the business involves high capital expenditures. More than 50% of the company’s capital expenditures were associated with its DBS business in the past four years.

We have been pessimistic on DBS and estimated EBITDA margins to grow moderately to 12.5% by 2020. This is because Sky Italia has been losing subscribers continuously in a saturated market. This implies that the pricing power may further reduce due to fierce competition while programming costs will continue to rise. Moreover, the ARPU has declined over the past few years while costs have been rising. Sky Italia’s ARPU has dropped over the past few years from $71 in 2008 to an estimated $62 in 2013. However, a merger with BSkyB can help the new entity negotiate better pricing with the content owners. BSkyB said it expects £200 million of annual cost savings by the end of the second financial year after the deal is completed. [3]

As far as Fox is concerned, it is a great deal and in correct time. Fox is eyeing its rival media house Time Warner and was rebuffed in an $80 billion bid. [4] If Fox needs to make a fresh offer, it will need a huge pile of cash. The company said that it expects net after-tax proceeds of $7.2 billion from the BSkyB transactions. [1] It already has $5.52 billion cash in hand. Further, it proposed selling CNN, as the news network might be a hurdle in regulatory approval. The network can fetch around $7 billion for the company. [5] Thus the company will have ready cash of $20 billion. While it can pump in more cash by taking loans, the BSkyB transactions are important part of the math for Time Warner bid. Investors so far are not very happy with Fox’s pursuit of Time Warner and the stock has fallen close to 10% since the beginning of the month. It will be interesting to see how events unfold from here and we will be closely looking for any update on the same during the conference call of both the companies in the first week of August.

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Notes:
  1. 21ST CENTURY FOX AGREES TO COMBINE EUROPEAN SATELLITE TELEVISION HOLDINGS; NEW SKY WILL BE EUROPE’S LEADING PAY-TELEVISION BUSINESS, 21st Century Fox’s Press Release, July 25, 2014 [] [] []
  2. 21st Century Fox’s SEC Filings []
  3. BSkyB to create a world-class multinational pay TV business with acquisition of Sky Italia and 57.4% stake in Sky Deutschland, Sky’s Press Release, Jul 25, 2014 []
  4. Time Warner Inc. Rejects Unsolicited Proposal From Twenty-First Century Fox, Time Warner Press Release, Jul 16, 2014 []
  5. Fox seen selling CNN rather than spinning off despite tax bill, Reuters, Jul 25, 2014 []