Kate Bulkley, Media Analyst.

The Italian Job

By Kate Bulkley

Cable & Satellite Europe

Issue 10, October 1st 2002

The key to any good heist is finding the right moment to do the job as well as having the right plan. Certainly Rupert Murdoch's deal wresting control of Telepiù, and thereby of the Italian pay-TV market, from Vivendi has been brilliantly executed. This is what we have grown to expect from Murdoch, his problems in the US satellite market notwithstanding.

Despite losing out to Echostar in the bidding for the Hughes DirecTV service in the States, this latest deal shows Murdoch to be back on form, striking a deal to buy out Vivendi-Universal's Italian interests for a lot less than originally planned. So after several attempts, News Corp finally has more than a mere toehold in continental European pay-TV. He plans to leverage what he has learned in the UK at BSkyB: the merged entity will be called Sky Italia.

The stunning part of the transaction is that not long ago Murdoch was considering selling, not buying, faced with the deal-hungry then VU CEO Jean-Marie Messier. That was before it became clear just how messy the balance sheet of VU's pay-TV unit Canal Plus really was and how the biggest drain of all was a black hole called Telepiù.

Messier's solution was to fire Canal Plus' Pierre Lescure, earning the wrath of the French cultural establishment, and opening the way for the Parisian business and political elite to get out their knives. Soon Messier was out and strategies were re-thought.

Amid all this, Murdoch waited and watched the price originally put on Telepiù of some €1.5bn fall as the post-Messier management, led by ex-pharmaceutical executive Jean-René Fourtou, scrambled to cut VU's staggering debt pile and put back some confidence in the company's sagging stock price. The comment made by V-U about Telepiù's final sale price of a €893m, consisting of €470m in cash and News Corp's assumption of Telepiù's estimated €423m debts on completion of the deal at the end of the year, was that the price, although lower than originally envisioned, would help VU's current liquidity crisis.

Now if that isn't the justification of a drowning man, I don't know what is.

For Murdoch, the deal just seems to get better. Even if the pay-TV subscriber count at Telepiù is lower than Murdoch's number crunchers believe (Stream and Telepiù together are supposed to have 2.3m subscribers), the lowered price allows Murdoch to control 80% of the enlarged company and to forecast €1.7m in sales for the combined platform in 2003. Telecom Italia will have a 20% stake in the enlarged pay-TV group.

Once the two platforms are merged, hefty costs like the over-the-top prices paid by both Stream and Telepiù for live Italian football rights can be re-negotiated. Another financial fillip to Murdoch will be the proceeds from two terrestrial TV licences that have to be sold to comply with Italian regulatory requirements. And let us not forget the added benefit that Murdoch negotiated: that a $1bn lawsuit alleging piracy brought against NDS, the News Corp technology company, by Canal Plus Technologies, the TV technology unit of VU, will be dropped.

All this looks good on paper, but the big unknown in Murdoch's Italian job is that other Italian TV mogul, Silvio Berlusconi. As the Prime Minister and the head of Italian media giant Mediaset, Berlusconi has his fingers on Italy's TV remote control. Mediaset not only controls three of the country's six national broadcast licences, but as PM he has the power to appoint the heads of the three state-controlled Rai channels. If this were not enough, in September Berlusconi's government proposed changes in Italy's media laws that would further favour Mediaset. Among the most blatant is a proposal to reverse a law that has called for Rete 4, the smallest of the Mediaset channels, to be taken off the air in the interests of greater competition. Another proposed new rule would cap telecommunication companies' investment in media at 10%, which, if made law, would force Telecom Italia to sell down its 20% stake in Sky Italia. Needless to say, the proposals also would allow for more cross-media ownership of print and TV, which could also benefit Mediaset.

So here's a scenario: Mediaset's advertising revenues were down nearly 3% for its fiscal 2002 year, but the fall off would have been double that if not for the advertising brought in by showing football matches on its terrestrial channels. One of the key ingredients of pay-TV is live sports, something that Murdoch has used to his advantage to boost subscriptions to BSkyB, but what is to stop Berlusconi's government from mandating, for example, more soccer on free TV?

For the moment Murdoch is sitting pretty, but he'll have to keep a close watch on Rome to make good his getaway.

 

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