BSkyB (BSY) raised eyebrows when it sold its 6.4 per cent stake in ITV (ITV) to international cable giant Liberty Global for £481m last week. The pay-TV and telecoms provider may have found the 185p a share deal - a 37 per cent return on its investment since 2006 - too juicy to pass up.
The stake's value was limited as increasing it would likely have drawn the ire of antitrust regulators. And the sale proceeds should replenish BSkyB's war chest ahead of further skirmishes with BT over broadcasting rights. The battle has already driven a 7.5 per cent rise in BSkyB's programming costs in the nine months to 31 March, widening its adjusted operating loss by 8.5 per cent to £910m.
BSkyB may also use the sale returns to help fund its purchase of Sky Deutschland and Sky Italia from US media titan 21st Century Fox. Fox, whose $80bn (£46.8bn) bid for Time Warner was rejected last week, is reportedly keen to sell those subsidiaries to further bolster its offer. And BSkyB expects the creation of "Sky Europe" to drive efficiencies across its business. It would probably need to find "anywhere between £5bn and £8bn" to finance the deal, says Numis analyst Paul Richards.
BSkyB's sale boosted shares in ITV by as much as 10 per cent as takeover rumours began to swirl. Liberty declined to bid for the broadcaster at this point, which rules out an approach for the next six months under UK law. But its stake-building could spur a rival bidder to emerge, which would open the door to a return. And given Liberty's track record, a buyout of ITV wouldn't come as a total surprise. It has acquired Virgin Media, Dutch cable provider Ziggo and The Only Way is Essex creator All3Media in the past 18 months. Moreover, one of Virgin Media's subsidiaries, NTL, tried to buy ITV in 2006.
Liberty's interest in ITV may stem from its need for greater clout in negotiations with content and channel partners, as well as protection from rising content costs. ITV's production business, where sales rose 20 per cent to £857m last year, is a major draw. Analysts estimate ITV will earn only a quarter of its revenues from content production this year, but that proportion looks set to rise.
Producing more content could help ITV replace volatile advertising revenues with retransmission fees, which it charges to Pay-TV operators such as Sky who want to show its channels. Current regulations prohibit ITV from charging them for its main channel, ITV1, but those could be relaxed soon. Both those trends could make ITV a better fit for Liberty, which mostly generates steady, subscription-based cash flows.
A deal could also have tax benefits. Liberty's Virgin Media has £4.6bn in gross deferred tax assets, which it could use to lower the tax bill of ITV, expected to be £175m in 2015. But Liberty would need to build a 75 per cent stake to realise that perk. That might be too pricy, given that Liberty's pre-tax losses widened by 3.4 per cent to $527m last year and it had $44.5bn in net debt at the end of March.
ITV shareholders would also gain from any tie-up. The broadcaster could leverage Liberty's content and distribution resources and broaden its access to audiences. And the strength of its partnership with Sky, which resulted in paid-for drama channel ITV Encore in June, should mean it doesn't lose out.
