Kate Bulkley, Media Analyst.

Media money: Has James Murdoch finally wooed the City?

By Kate Bulkley

Broadcast News

For Broadcast July 19, 2007

Any love affair has its trials, but, right now, Sky and the City are at least holding hands.

It has not been an easy road for young James Murdoch, but the claims of nepotism that greeted the 30-year-old's appointment as chief executive in 2003 now seem a distant memory. Last week Merrill Lynch, UBS, Morgan Stanley, Lehman Brothers and Sanford Bernstein all had nice things to say, most upgrading their stock price targets above 750p (Bear Sterns to 820p). Given that in early April the stock was at 561p, this is a pretty big switch, but the fact is that Sky is delivering when its competitors are not. The 90,000 new subscribers in the recent quarter was above City estimates; broadband sign-ups are six months ahead of Sky's targets after a 56% surge to 716,000; and customer disconnection or churn, is down from 13.7% to 12.1%.

The City had been sceptical of Sky's ability to be more than a TV company, but the numbers suggest it does have the ability to grow beyond its TV base: a third of customers signing up for broadband are new to Sky and 317,000 of its 8.6 million subscribers are "See, Speak, Surf"-ers, taking all three products. Even the 10 million-subscriber target set for 2010 doesn't look quite so difficult any more.

James Murdoch has been focused while the opposition is fumbling. It's been three years since his 2004 "Billingsgate speech" where he outlined a massive capital investment programme that culminated in the 2005 deal to buy telephony network company Easynet and the £400m push into broadband.

Now, while Virgin Media is contemplating yet another ownership structure and Carphone Warehouse has lost credibility, Sky's average revenue per user (ARPU) is £412, compared with £406 at the end of March - a rise of £21 in the year. The City now sees Sky's dive into the £25bn telephony market (telephone, broadband and online advertising) as a cool move. The Competition Commission's investigation into its purchase of a 17.9% stake in ITV and Ofcom's review of pay TV (including Sky's hold on the market) may be problematic, but the City says an Ofcom referral to the Competition Commission is difficult to "price as a risk" and for the moment the love from the City is overshadowing any doubt.

Will a Virgin Media sale change anything?

So Virgin Media might get sold to the private equity company Carlyle Group (or another of the circling pack) but will another change of ownership and maybe another change of name make any difference?

Virgin Media is said to be worth £11bn to the private equity world, but it lost £120m in the three months to March and has debts of about £6bn. Its churn rate is one in five and it is stuttering along waging a media war against Sky. Add to that flat (at best) performances for the telephone and broadband sections of the business and you might think the Carlyle Group needs its head seeing to.

A new owner will face the same depressing news unless three things happen: better management that understand the British media environment; better customer services and a better offer than the self-satisfied Quad Play.

Taking VM private would mean no more quarterly spotlights, allowing it to spend money short-term to get operating income to a higher percentage of sales Ð at the moment it is at 34%, against figures of 46% at Belgium's Telenet and 48% at Germany's Kabel Deutschland.

But if it happens, the VM deal will be one of the most expensive public to private takeovers in UK business history, so the new bosses will pay to have their night of the long knives behind closed doors. Good luck to them Ð all the other attempts have failed.

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