The coming year promises to bring further consolidation in the European TV biz as deep-pocketed telcos like Spain’s Telefonica entrench themselves further in content provision and quadplay services. There are potential acquisition plays from such giants as Vodafone and BT, while sports rights remain a key bone to be fought over, impacting the business in different ways. The new year also offers the prospect of some power plays from two of Europe’s heaviest hitters in Rupert Murdoch’s Sky Europe and French conglomerate Vivendi.
What Murdoch plans to do next, following the creation this year of Sky Europe — which merged his UK, Italian and German pay-TV operations — is likely to have a seismic impact on the European and international TV landscape. Rumors have been rife that Murdoch, who has stayed one step ahead of his competitors for the majority of his career, plans to divest his 39% stake in Sky Europe (worth more than $4B) to fund a renewed bid for Time Warner. Having spent decades building a global distribution platform across multiple media, Murdoch is believed to want to pivot Fox’s focus to lie more squarely on content rather than distribution.
That strategic decision comes in the face of competition from the likes of new entrants such as Netflix, which continues its international expansion — especially in Europe — and Amazon, as well as the fierce challenges posed by telephony companies entering the market seeking to offer audiences quadplay services: fusing TV, mobile, broadband and wireless.
Even Telecom Italia, which suffered a significant defeat at the hands of Telefonica this year in its attempts to acquire French media giant Vivendi’s Brazilian broadband operator GVT, has signed a content deal with what was Sky Italia and is set to ink a separate deal with Silvio Berlusconi’s Mediaset.
The emergence of digital technology and ever-faster broadband services also leaves major long-term question marks about the future and viability of satellite pay-TV in general. In the UK, telco BT has challenged Sky’s dominant position in live sports broadcasting, and Liberty Global’s 2013 acquisition of Virgin Media also bears the prospect of a new, deep-pocketed pan-European platform.
With the European market far more fluid than its American counterpart, one can expect a fair amount of M&A activity in the months ahead. Here’s a rundown of what to keep an eye on across this landscape in 2015:
While speculation has run rampant as to a takeover of John Malone’s Liberty Global by Vodafone, the latter company’s CEO Vittorio Colao denied in early December that he was planning such a move. Still, the exec reportedly noted he would “happily” investigate a possible acquisition of Liberty’s German cable network. It’s not unusual for executives to try to staunch rumors in the case of such big deals as this, which has been estimated to come with a price tag of around £40B.
But how would the companies fit together if this does shake out in the new year? Liberty’s biggest asset in terms of revenues is Virgin Media in the UK. Enders Analysis believes the consumer aspect of Virgin would be attractive to Vodafone, however it currently has no fixed-line subscribers in the UK. That’s not the case in Germany and Spain, where Liberty has cable systems, which helps add credence to a possible takeover. The business fixed-line side and the mobile side also would be attractive but would draw major regulatory scrutiny, since Vodafone is the No. 2 fixed-line business and the No. 3 mobile operator in Britain. Liberty’s second-biggest asset is in Germany, where it owns Unitymedia KabelBW, the No.2 cable operator. However, there is a pending regulatory decision that is being disputed there. Vodafone also has a large cable presence in the country, where anti-trust authorities are notoriously hostile to cable consolidation. Of Liberty’s other 12 country operations, seven are in places where Vodafone has no presence at all, and four are in markets where it has little fixed-line presence.
Enders believes that for Vodafone to go after Liberty, “it would have to want Virgin Media pretty badly, despite limited synergies, and/or believe the German anti-trust authorities will change their tune. From an industrial logic perspective, the case is unusually weak, although this has admittedly never stopped Vodafone in the past.”
Although Liberty Global owns All3Media (with Discovery Communications) and a portion of British broadcaster ITV, one industry insider doesn’t believe content comes into play here. “If Vodafone did buy it, it would be to give them fixed-line infrastructure and broadband. They are not buying into a content powerhouse.” However, “if they have ambitions around TV, they could either buddy up with existing providers where they build a TV platform as a set-top box operator, or they buy into content and try to do it themselves.” But, the insider adds, “I would question whether a mobile network operator would have the appetite or risk profile for original content.”
While BT competes with Sky for coveted soccer rights in the UK — and has the deep pockets to do so — it also is looking to get back into the mobile business. The company said in December that it was in exclusive talks with France’s Orange and Germany’s Deutsche Telekom to acquire their mobile business, EE. The cost there is about $19.5B. The New York Times’ DealBook speculated at the time the talks were disclosed that an EE acquisition would give BT the opportunity to better compete in the ever-shifting European telecoms world. “We firmly believe that convergence is the future of telecommunications in Europe,” said Thomas Dannenfeldt, EE’s board chairman and CFO of Deutsche Telekom, when the companies’ talks were announced. “Customers want fixed-mobile converged services from a single provider.”
The company’s move toward EE reflects its “strong ambitions in multi-play and serves as a clear warning to UK rivals, notably Vodafone, Sky and Virgin Media,” CSS Insight analyst Paolo Pescatore told the NYT. “These companies will be forced to review their position as the market for convergence in the UK rapidly comes to the boil.”
Many see Sky as being one of the UK players the most impacted. BT, which acquired the UK business of ESPN last year, has been aggressive in its competition for sports rights with Sky, paying £246M for 38 matches in each of three seasons of the Premiership, and those rights are up for auction again this year. Cavendish Corporate Finance partner Nick Jones told Reuters in mid-December: “The battle for content will put long-term cost pressure on Sky at the same time that BT and others will compete on price for subscribers. Sky’s margins will come under increasing structural pressure.”
In 2012, the Murdoch-controlled BSkyB found itself faced with fierce competition from new sports rights bidder BT. Sky has been the dominant player on the Premier League soccer pitch for two decades, but ended up paying £2.3B for rights to 116 matches per season beginning in 2013 and for three years. It lost out on 38 matches, which went to BT, including almost half of the first-pick games, for £738M over three years. That raised the cost of the Premiership’s full roster by 71%, and there is no sign the numbers are going to go down when results of the blind auction, which is underway, become public in mid-February. What’s more, Sky is staring down increased competition from BT, which also owns rights to the Champions League and Europa League soccer matches starting next year. Meanwhile, were Vodafone to go forward with the speculated takeover of Liberty Global, it could drive the cost up by about 50%, it’s been estimated.
The current average price per game is about £6M, and whoever comes out on top has to know the number under which that can be profitable and over which it can’t. An industry source says of potential new entrants, “If you weren’t currently operating in the UK market, would you look at the market for pay sports and see it as attractive? With £6 million for each match, you need a lot of apparatus in the UK.” We’ve heard speculation that Virgin is not interested in competing for rights — it wants to be able to show the Premier League as it does now “but doesn’t want to be the ones to own,” we’re told.
BT has deep pockets, but Sky increased its war chest by $824M when it recently sold off its stake in ITV — to Liberty Global. However, it also increased its net debt with the acquisition of Sky Italia and Sky Deutschland, the Financial Times has noted. It’s expected that a split-rights situation will emerge again, but it’s important for Sky to maintain its grip on a majority as that’s one of the biggest drivers of subscribers to its pay-TV service. Still, Enders’ Michael Underhill told the FT: “Sky is a more diversified business than it was even five years ago. Sport is crucial for its subscribers, but Sky would survive even if it worked as a 50-50 provider with BT.” Conventional wisdom holds that Sky will do whatever is necessary to maintain its hold on as many rights as possible.
Other speculation as to new entrants has focused on the Al-Jazeera-owned BeIn Sport. BeIn has waged a colossal war with Canal Plus in France over similar turf. By snapping up major soccer, tennis and rugby rights, it’s become a big rival to the French pay-TV giant at the same time as Netflix is pressuring Canal with its arrival. This has the knock-on effect of concern over Canal’s cinema obligations. It is the single biggest investor in the French movie industry, via an official requirement to spend a portion of its annual revenue on local and European movies. The cost it has incurred in its fight with BeIn has led to fear within the industry. Canal also needs to keep spending on content to feed its channels (which includes original TV series, an area the company is keen to dig deeper into) as Netflix flexes its muscle.
All eyes now are on Canal’s parent Vivendi and its billionaire chairman Vincent Bolloré, still relatively new in the position having been appointed in June. Already flush with cash from the Bolloré-orchestrated sales of its stakes in telcos SFR in France and Maroc Telecom in Morocco, as well as video game publisher Activision Blizzard, Vivendi’s share price has risen by more than 25% since September 2012. That was when Bolloré first made public his intention to acquire a 5% stake in Vivendi, at the time an unwieldy combination of pay-TV, film, telco, music and video game activities.
Under Bolloré, Vivendi has streamlined to focus on creating synergies among Canal Plus, StudioCanal and Universal Media Group, which Vivendi also owns. StudioCanal also has established itself as a major global film biz player, buoyed by its best-ever results in the UK under the canny leadership of Danny Perkins and blockbuster returns for Paddington and The Imitation Game.
The timing now might be right for Bolloré to set Vivendi on its own spending spree. Already a strong presence in Italy thanks to his 9% stake in Mediobanca, Italy’s best-known investment bank, Bolloré also might explore other Italian media opportunities. Rumors have flown in recent months that Mediaset could be available to the right buyer at the right price.
An even more tantalizing option might be if Vivendi kicks the tires of Sky Europe. Although navigating the minefield of European competition might prove a bureaucratic nightmare, the prospect of Vivendi consolidating its own pay-TV operations in France with those in the UK and Germany — where it already has film distribution — as well as Italy could pave the way for the first genuinely global, independent European studio.