Sumner’s Clever U.K. Adventure

By Bob Jenkins

The U.K. government's publication last summer of the draft Communications Bill met with a great deal of local press speculation as to which American company would bid for which British broadcast asset and what, precisely, Rupert Murdoch would do with Channel Five once he bought it. This speculation made good copy but overlooked a number of key factors. For instance, Five is 65 percent owned by Bertelsmann subsidiary RTL, whose COO, Didier Bellens, has repeatedly made clear that its stake is not for sale. The speculation also overlooked the total lack of synergy such an acquisition would offer News Corp. From Murdoch's perspective, Five into Sky just doesn't go.

Turning their attention to a possible U.S. takeover of ITV, the Cassandras wrung their hands at the prospect of a U.S. major acquiring Britain's leading commercial broadcaster and using its schedules as a dumping ground for American programming. Such speculation ignored two important points. Firstly, abusing local tastes and culture in that way would lose the abuser the cost of acquisition faster than Serena William's first serve - a lot faster in fact. Secondly, right now, no one in American broadcasting is in any shape to think about acquiring ITV, except perhaps Viacom, whose chairman and CEO, Sumner Redstone, popped across the pond last November to address the Royal Television Society (RTS) and have tea and biscuits with Prime Minister Tony Blair.

Viacom is an impressive company. In broadcasting alone, it owns two U.S. networks (CBS and UPN) and 39 local stations. Its cable brands - Nickelodeon, MTV, VH1, TMF and, in Holland, Kindernet - now operate 80 channels worldwide, reaching just short of 780 million households in aggregate. When its other businesses, such as America's largest group of radio stations (Infinity, which has 183), Blockbuster Video, Paramount Studios and a major worldwide billboard operation, are considered, the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortization) for the first nine months of 2002 at $4.3 billion is understandable. Although the stock price, by Redstone's own admission, has performed "disappointingly," Viacom does boast a strong free cash flow, and has numbers that would be greeted with unconfined joy at AOL Time Warner, Vivendi Universal, Disney, and many other possible ITV suitors. As a percentage of EBITDA, Viacom's assets have the lowest capital requirements when compared to many potential rivals. At 11 percent, it is in way better shape than, for example, AOL Time Warner at 32 percent and Disney at 39 percent. So, unquestionably, Viacom has the means and opportunity, but does it have the motive?

Certainly the company and its CEO are both Anglophiles. Every single international and European operation run by Viacom is based in the U.K., where it employs 10,000 people, and Redstone, speaking at the RTS dinner, announced a production tie-up with both ITV and Channel 4 while telling his audience, "Viacom values its U.K. partnerships and we want to expand them."

That such an expansion will take the form of a bid for ITV is, however, about as clear as an Iraqi arms declaration. His president and COO, Mel Karmazin, has been quoted as saying of the U.K.: "There's nothing out there that we need badly enough to over-pay for it." Given the state of shares in both Granada Media and Carlton, and the likely absence of any other serious bidder, it is difficult to see how Viacom could end up over-paying.

Any serious bidder, that is, apart from Granada and Carlton themselves. The two commercial giants have announced agreed terms for a merger. The government is looking at the potential ramifications of such a merger and secretary of state Tessa Jowell could decide to refer the question to the competition commission. Even if she does, a decision will still have to be made no later than the end of April or early May. Under these circumstances, it is difficult to imagine a serious bidder emerging before such an announcement, even though January did see the emergence of a rumor that German bank WestLB was preparing a bid, in association with Viacom, of £1 billion ($1.6 billion) for Carlton - a rumor which was swiftly denied by all parties and which might have been spoiling the tactics of forces opposed to the proposed Granada/Carlton merger.

All of which is intriguing. Yet the question remains: why would Viacom want a single ITV? Even assuming the Granada/Carlton merger is approved, it would not create a "single" ITV, as both Ulster and Scottish would remain independent companies, not to mention that ITV is still a business with a number of serious problems, some of them structural. Also, it is as difficult to see the synergies that ITV would bring to Viacom, as it is to envision those that Five would bring to News Corp. The acquisition of merged cable giants NTL and Telewest, however, would be a different story. No matter how big an Anglophile Redstone and Viacom might feel themselves to be, their operation in the U.K. is massively dependent on non-Anglophile Murdoch and his BskyB's continued carriage of the Viacom channels.

Following Sky's recent high-profile hijacking of Five CEO Dawn Airey - U.K. broadcasting's next best thing to toast - with the specific remit to establish three new music channels, MTV, VH1 and TMF might be wondering how many music channels one platform can sustain. And with the blossoming of an unlikely friendship between the BBC and Sky in the new and hugely successful DTT platform, Freeview, similar thoughts might be in the minds of senior executives at Nickelodeon. But if Viacom possessed its own platform, these executives might find themselves relishing the prospect of a fair fight, rather than dreading the midnight knock.

For a while it looked as if the acquisition of a merged NTL and Telewest had one significant disadvantage that an acquisition of ITV did not: competition. This appeared as though it might come from John Malone, whose Liberty Media has long held a 25 percent stake in Telewest and has been thought to see Europe as a key area of expansion. However, following the redlining of his bid for the cable assets of Deutsche Telekom, the mounting problems at pan-European satellite broadcaster UPC, and the Denver investor's double declining of an offer to buy Microsoft's stake in Telewest, it looks increasingly as if one American, at least, has decided against the policy of forcing international regime change. The fact that another, NTL CEO Barclay Knapp, has emphatically ruled out such a merger will provide few sleepless nights to a big beast like Sumner Redstone.

Either way, Redstone told his RTS audience that he had received a "warm and generous reception from Tony Blair." If he were offering to bail out the deeply troubled British cable industry while simultaneously creating a rival to Murdoch worthy of the name, it would have been churlish in the extreme for the Prime Minister to have behaved in any other fashion.