It is a Fight to the Death : Branson v. Murdoch

Michael Hedges March 28, 2007

When Big Media turns to the courts and the regulators to arbitrate business negotiations it’s clear that the consolidation cycle is turning down.
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UK media regulator OFCOM opened an investigation last week into charges that unfairness took place in pay-TV land. Virgin Media (Richard Branson) cut off basic BSkyB channels (Rupert and James Murdoch) from its pay-TV network. The distribution deal between Virgin Media and BSkyB had not been extended, a polite way of saying that Mr. Branson and Sr. and Jr. Murdoch are frothing at each other on a variety of issues.

Mr. Branson, we recall, wanted to buy control of ITV through a highly leveraged deal. Mr. Murdoch the Senior put an end to that by buying a minority but significant stake, certainly sufficient to make his views known at the board meetings. Mr. Branson howled in pain.

The usual name-calling ensued. Virgin Media and other hopefuls in the pay-TV race took their complaint to the regulator.

Competition – and the lack thereof – is one issue. All UK pay-TV operators are shuffling their schedules and channels trying to find advantageous mixes – and more subscription fees.  The preferred means of acquiring more subscribers, however, is buying control or controlling interests in competitors. It’s far easier than actually working for customers interests and, better still, easy financing is readily available.

Accepting industry consolidation for what it is – a rather normal stage in the business cycle –  a whole new set of issues arise when it stops. An American example illustrates: Clear Channel discovered that it cannot operate about one-third of the 1100 radio stations it owns. What to do? Take the company out of public financial markets. This avoids those nasty meeting with shareholders howling mad because the share-price is down to one-third of the buy-in price. Ouch!

Media consolidation comes to a screeching halt when customers – audiences and advertisers – feel the effects of the inevitable cost-cutting and, bloody hell!, move on to something else. Companies stuck with wrung-.out assets, which they never wanted to actually operate, will do anything to avoid accountability, er, those meetings. 

Structurally, media companies find themselves in a quandary. For those with scale financing is readily available for any deal. Henry Kravis (KKR) is just a phone call away. Dubai World is hinting at an imminent €4 billion Western European media deal. Turkey’s Dogan Media also has deep pockets and a willingness to take on all the structural problems with Western European media just to get into the market and, lest we forget, move some of that cash. KKR and other private equity firms do what companies are unwilling to do for themselves: break up and move on.

One fascinating detail in all of this grumbling among media peers is the degree to which the Murdoch kingdom is increasingly the target. Long the poster-child for every ugly notion about media barons only in recent months have the Murdoch owned companies found themselves facing a real challenge, supported by both public and political opinion. The shifting UK political winds have raised questions about Mr. Murdoch’s influence, waning perhaps. That the UK regulator would so quickly be moved to react removes all doubt.

Every business consulting firm (PWC, et.al.) predicts for 2007, gleefully, more mergers and acquisitions. This is, afterall, their bread and butter. Telling their own shareholders that this M&A cycle is running out of steam risks that big bonus.

Richard Branson and Rupert Murdoch graphics (c)graphicnews, used by permission

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Regulators Oppose BSkyB’s Stake In ITV -- April 30, 2007

Two British regulators have said that BSkyB’s 17.9% stake in ITV, the UK’s largest commercial broadcaster, affects the plurality of news and is as good as a merger, forcing the government  to decide whether to send the whole issue to the Competition Commission.

The Trade and Industry Secretary has until May 26 to make his decision, but with Ofcom, the telecoms regulator, saying the deal questions “plurality of news” and the Office of Fair Trading (OFT) saying that Sky’s £940 million raid on 17.9% of ITV last November is as good as a merger because of voting rules that require 75% approval by shareholders, it will be difficult for the government not to take the issue to the next logical step.

Alistair Darling, the trade and industry secretary, showed courage by seeking the original reviews in the first place. BSkyB’s ultimate force is Rupert Murdoch (News Corporation has a 39.1% ownership) who wields tremendous media influence in the UK via his newspaper and broadcast outlets. It is often said in the UK’s political world that Murdoch’s media endorsements of a political party during the general elections can strongly affect the outcome.

On the other hand, Sir Richard Branson also has his powerbase. The Sunday Times 2007 ranking of the UK’s richest rich put him in 11th place with a fortune estimated at £3.1 billion. Branson’s Virgin Media – he holds an 11% stake as the largest shareholder -- was near to making a bid for ITV until BSkyB’s dawn raid, sending Branson ballistic. Since then the two companies have been locked in another battle over Sky’s withdrawal of channels from Virgin’s cable TV service – Virgin claimed Sky wanted to double the fee.

No love loss, then, between Murdoch and Branson, and the government is in the middle. If the Competition Commission were to force Sky to sell its ITV stake then Virgin could again look at ITV, but Virgin has been hinting lately that time has moved on, ITV has a new strong chief executive in Michael Grade, and there are other fish to fry, but then one never really knows. 

Even if Darling does not give the case to the Competition Commission, the OFT has the power to hand its files to the Commission, anyway.