The Anglo File: Will Rupert Murdoch Ever Get His Roman Holiday?

With the EU on monopoly alert, Murdoch may have to compromise to fulfill his European dream.
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Rupert Murdoch's latest plan to stamp his digital and analog footprint on Europe looks likely to run afoul of the regulators. As his options to break into the European market dwindle, Murdoch might be forced to do something totally out of character: compromise.

Murdoch's TV interests now span the U.S. and Asia, but continental Europe remains the last piece in his puzzle. Murdoch's sole interest in the region is the U.K., through

News Corp.'s

(NWS) - Get Report

40% stake in

British Sky Broadcasting

(BSY)

, or BSkyB. He has danced with all the major players in continental Europe at one time or another, but, each time, has fallen out of step.

Two and a half years ago, a three-way alliance between

Bertelsmann

of Germany,

Canal Plus

of France and BSkyB fell apart, and BSkyB failed to agree on terms two years ago with the most powerful name in the German media market,

Kirch

.

Now Murdoch has resumed conversation with his largest competitor in the region, Canal Plus. Canal Plus confirmed last week that it was in talks, yet again, with BSkyB about merging.

For BSkyB and shareholders alike, the benefits of a tie-up between the two pay-TV operators are not hard to see. Canal Plus dominates Europe's pay-TV industry with over seven million subscribers scattered across France, Italy and Spain. Going head-to-head with such a powerful competitor, even one as badly run as Canal Plus, would be prohibitively expensive for BSkyB.

An "if you can't beat 'em, join 'em" strategy would allow the two companies to drive down the costs of acquiring movies and the rights to broadcast sporting events. Theme channels could be easily transferred between the two, and the companies could also split the costs of niche channels in their various markets.

Canal Plus shareholders would also benefit hugely from the management prowess of BSkyB. Currently, BSkyB's margins are three times higher than those of Canal Plus in its domestic market, according to Laurent Carozzi, an analyst at

Paribas

.

The markets agree. Although in Monday's

Nasdaq

trading, BSkyB's shares closed off slightly at 55 1/8, the shares have risen 8.4% since reports of a possible merger first emerged on Feb. 23.

One scenario the two sides are exploring would be a full-scale merger of equals. This would mean that News Corp. would surrender its 40% of BSkyB in return for approximately 25% of the enlarged group.

However, unless the EU Commission looks at this deal through the rosiest of tinted glasses, it isn't likely to be impressed with Murdoch's argument that, since BSkyB and Canal Plus don't directly compete against each other in any one market, this deal won't decrease or increase competition.

"It's hard to argue that this deal won't produce a monopoly. BSkyB and Canal Plus have about 90% of the market in Europe. Excluding Germany, it's nearer 100%," says Terry Povey, media analyst at

HSBC Securities

.

There is a precedent for the EU Commission taking a hard line on potential monopoly-making deals. It blocked a merger between Anglo-Dutch publishing group

Reed Elsevier

and Holland's

Walters Kluwer

, and also stopped a planned German pay-TV merger between

Kirch

and

Bertelsmann

. Indeed, the EU's competition commissioner, Karel Van Miert, said last week that his department would launch an anti-trust investigation into any merger between BSkyB and Canal Plus. Hardly encouraging words for Murdoch to hear.

Other problems include Murdoch's unwillingness to dilute his stake in any merged entity, and the fact that a deal may threaten his plan to buy one of England's top soccer clubs,

Manchester United

. Canal Plus owns the French team

Paris St. Germain

, and UEFA -- European soccer's governing body -- has strict rules that no owner is allowed to enter more than one side in any European cup competition.

So What's A Poor Media Mogul To Do?

Perhaps less alarming to the authorities would be a plan bundling Canal Plus' non-French operations and sell 50% of the new entity to BSkyB. HSBC Securities estimates that a stake this size would be worth between $1.4 billion and $2 billion.

However, Canal Plus may have reservations about such a plan. The French company has had problems with many of its costly European expansion plans -- including failure to increase penetration rates, and weaknesses in local management. But with over 50% of its subscriber base in its domestic market, these ventures are considered a major growth area in the long term.

HSBC's Povey suggests Murdoch could look to become a co-investor in Canal Plus' ventures outside France. For example, Canal Plus owns 25% of

Spain Canal Plus

, and the rest is held by other shareholders whose stakes Murdoch could buy. In Italy, Canal Plus owns 90% of

TelePlus

, but it has indicated it would be happy to sell down that stake to under 50%.

The problem with this strategy is that a 10% stake in one of three pay-TV operators in a small market like Spain would in no way satisfy Murdoch's ambitions for Europe, argues Paribas' Carozzi. In fact, it is these grand designs for Europe that have, in the past, tended to irk both would-be partners as well as the relevant authorities.

Murdoch's plan to own the sole rights to broadcast Italian soccer angered the Italian government to such a degree it adopted a decree this year to limit the rights of any one company to broadcast the sport.

"Murdoch's problem with Europe is not the market but his strategy," says Carozzi.

"If he wants 100% of sports and movie rights in Italy then he's out of Europe. He has to compromise," says Carozzi. "If he can accept 40-50%

in Italy then he still can negotiate with a partner like

France's

TF1

."

Should Murdoch compromise, he might find governments and potential partners less recalcitrant. Carozzi believes other partners Murdoch could work with include TF1,

CLT/UFA

of Luxembourg and Kirsch, all of which would offer him a way into the European markets he covets.

Unfortunately, compromise is not Murdoch's forte. It is notable that all the other companies mentioned in this article were at one time or another wooed by Murdoch, but later dropped as he sought a more attractive deal elsewhere. Compromise is clearly the name of European media game; the question is whether this corporate leopard is willing to change his spots in order to play.