The Anglo File: BSkyB to Suffer From Vivendi-Seagram Tie-Up - TheStreet

LONDON -- For a good example of the complexity of the relationships between Europe's media players, look no further than how investors in British Sky Broadcasting (BSY) began immediately fretting over how a possible merger between Vivendi (VVDIY) , Canal Plus and Seagram (VO) - Get Report would affect them.

Last week, Vivendi shocked the market and sent BSkyB shares tumbling over 20% after it said it was selling 3% of its stake in the U.K.-based broadcasting giant to raise funds for a French third-generation mobile-phone license.

Predictably, when the news broke Wednesday morning of Vivendi's talks with Seagram, the market sensed the worst.

"We think

any merger is bad news for BSkyB," says Toby Reeks, media analyst with

Credit Lyonnais

. "It means Vivendi could start selling down its stake in BSkyB because they need the cash to pay for the merger."

However, a comfort note from Vivendi this morning saying that it had no plans to sell any more of its 20% stake in the U.K.'s largest pay-television company managed to push up BSkyB shares 77 pence, or 6.7%, to

12.21 ($18.32).

So is that light at the end of the tunnel for BSkyB? Unlikely. Many observers think it's all downhill from now on for BSkyB.

What a Tangled Web We Weave

Aside from the share issue, the business relationship between Vivendi Chief Executive Jean-Marie Messier and BSkyB's largest shareholder Rupert Murdoch has never been an easy one.

With 14 million subscribers, Canal Plus -- 49%-owned by Vivendi -- is by far Europe's largest pay-television company, although at present it doesn't have any major interests in the U.K. Its boss, former television journalist Pierre Lescure, has privately expressed reservations about Vivendi's relationship with BSkyB all along, according to sources close to him.

With the Seagram merger talks back on track, it is Canal Plus that stands to gain the most, because it would become less dependent on content -- music, television and movies -- bought from third parties. Instead, it would have access to Seagram's vast array of content, according to analysts at

ABN-Amro

.

"This in turn would accentuate the differential between Canal Plus and BSkyB, since the latter effectively has no direct-content arm," said ABN-Amro in a briefing note.

Seagram's

Universal Music Group

is the world's largest record company, its Universal films has a 4,000-title film library and Canal Plus has a 5,000 feature-film catalogue. These content businesses would be bundled with Universal's expanding theme-park interests, Canal Plus' wide European pay-TV platform and Vivendi's extensive telephone, wireless and Internet interests.

There is also the relationship with mobile-phone giant

Vodafone AirTouch

(VOD) - Get Report

as Vivendi's partner in its multiaccess Internet portal called

Vizzavi

. The portal has a potential subscriber base of around 80 million through its access to both Canal Plus and Vodafone customers.

Put all this together and some analysts estimate the combined operations would earn revenue next year of about

40 billion.

Late afternoon on Wednesday, Canal Plus shares were down 2.00 euros, or 1.0%, to 208.00, and Vivendi shares tanked 10.60 euros, or 9.2%, to 105.00 on fears over the potential costs of the merger.

Yet the Vivendi/Seagram talks seem to have spurred Murdoch's allies into action. As the news about the Seagram/Vivendi discussions broke in Australia,

Merrill Lynch

(MER)

announced that

News Corp.

(NWS) - Get Report

, the company run by Murdoch and which owns 40% of BSkyB, was close to floating

Platco

. Platco is a subsidiary that holds News Corp.'s global satellite assets, including its stake in BSkyB.

However, the future direction of Platco may depend on whether Vivendi's Messier and Murdoch pull off an agreement because Messier has to be a party to the deal due to the size of his stake in BSkyB.

Messier intends to play hardball. He has said he will sign up to a spinoff of Platco only if BSkyB abandons its 50% stake in Italian pay-television company

Stream

, which is a major rival of the Canal Plus outfit

Telepiu

.

Some reports have suggested that Murdoch and Messier have come to an agreement, in which Vivendi would exchange its BSkyB shares for a 10%-12% holding in Platco. But nothing has been confirmed, leaving investors and market observers to mull over how complex the whole world of media has become.