http://www.theaustralian.com.au/bus...s-parents-begins/story-e6frg996-1226065174433
Honeymoon for Foxtel Sports' parents begins
THE marriage of Australia's two surviving pay-TV operators, Foxtel and Austar, is finally about to happen after years of frustrated courting. This will be just the beginning of a spectacularly lucrative journey for Foxtel's parents.
After the trip up the aisle, assuming no last minute objections from the Australian Competition & Consumer Commission, the newlyweds will have to deal with their bastard child -- Fox Sports.
And when that is done, they'll sell themselves to anyone. Before we leave these tortured wedding analogies we should mention that if anyone gets screwed in the process, it's unlikely to be the parents.
Pay-TV came late to Australia. Until the 1990s, the powerful free-to-air lobby led by the late Kerry Packer stymied those wanting to follow the US and bring multiple viewing choices to local viewers.
When the Keating government bowed to the pressure it was keen to ensure we had a competitive pay-TV environment. As if competition between the free-to-air and pay sectors was not enough, the government insisted on multiple operators in the new game. It conducted risible auctions for licences to bring pay-TV to the masses. The process was confused by cleverly constructed cascading bids that saw the licences end up in the hands of cowboys, who sold them on to entities that had more financial backing and the know-how to establish a viable business.
But it was not enough. The first operator, Australis, went broke and the costs of the Packer-backed Optus service nearly sent its telco parent to the wall. The story is vividly told in Mark Westfield's 2000 book The Gatekeepers and from today's viewpoint it shows the insanity of governments dictating the terms on which businesses should be run.
The key player in the early days of Foxtel was Kerry Packer. He initially agreed to be part of the PMT consortium -- Packer, Murdoch, Telstra -- but he reneged before any licences were issued, preferring to risk a bigger share of the pie through a partnership with Telstra's biggest competitor, Optus.
Murdoch and Telstra pressed on as 50-50 partners in Foxtel but when Packer saw that Optus had neither the firepower nor the skills to win the battle for subscribers, he exercised an agreement that allowed him back into Foxtel. Murdoch and Packer expected each partner to have 33 per cent of the business. Trouble was, their agreement did not include Telstra. The then chief executive, Frank Blount, refused to water down his shareholding, and Packer and Murdoch were forced to take 25 per cent each. But Murdoch held the whip hand because his News Limited (owner of The Australian) held management rights.
Blount's refusal set the scene for much animosity between the partners. It created a dysfunctional board and internal feuds, which have been buried only recently. This inability to align interests has twice before derailed proposals to merge Foxtel and Austar.
Perhaps anticipating an unhappy relationship between the partners, Packer and Murdoch engineered a clever play to get their own back on Blount. They became partners in the Premier Media Group, which owned the Fox Sports channels. They bid for and tied up pay-TV rights to the world's major sporting events and then charged premium rates for Foxtel to broadcast those sports. PMG became hugely profitable, as Foxtel struggled to make a quid.
Telstra fumed that PMG's profits covered Foxtel's losses. It argued that sport was such a vital part of the Foxtel business that Foxtel should hold the rights. The PMG partners claimed that Telstra was overcharging for the use of its cable and was making equal profits at the expense of Foxtel. The early noughties were a period of great acrimony.
These arm wrestles lost their intensity as Foxtel's subscriber numbers grew and the company moved into profit. Chief executive Kim Williams was a skilful peacemaker -- a process helped by Telstra's need to draw on Foxtel content to power its mobile TV and T-Box services. In recent years, co-operation has made more sense than aggression. Nevertheless, Telstra twice kyboshed moves to merge with Austar, each time baulking at the price to be paid to the wily American, John Malone. In 2007, he was immovable on a $2 share price and Telstra refused to take on the debt that would be required to fund a $2.2 billion deal. Now Malone has agreed to $1.52, but with a much stronger Australian dollar, which values the deal at $US2bn ($1.9bn).
The numbers stack up. Last year, Foxtel made $278 million profit on subscriber revenues of $1.78bn. Austar made almost $100m on subscriber revenues of $711m. Put them together, add advertising revenues and an expected $70m annual efficiency gain, and you have a company with revenues of about $2.8bn and profits nudging $500m. Subscriber numbers have been slow to grow in recent years because of consumer uncertainty related to the global financial crisis and the introduction of the 15-channel FTA Freeview service, which included dedicated news and kids channels, once the exclusive preserve of the pay sector.
But revenues have still grown thanks to new technologies such as the IQ2 recorder boxes and new high-definition channels, which have encouraged subscribers to upgrade their services. The vital statistic of average revenue per unit (ARPU) has risen to $1100 annually for Foxtel and $1000 for Austar. Both businesses have managed to keep churn -- the percentage of people who quit the service after sampling it -- to between 10 and 12 per cent.
The next step will almost certainly be a public float of the business. It might take a year or two to get regulatory approvals and bed down the merger and the partners may decide to wait for propitious market conditions.
The investment community would probably insist the PMG/Fox Sports situation also be resolved so that Foxtel is master of its own sports destiny. Murdoch and Packer interests would expect a very big payday from the sale of PMG into Foxtel, and that would be followed by another jackpot when they sold a swag of their shares into the market.
Assuming a $500m profit (on today's numbers) and a conservative 10 times price-earnings for the float, and you're looking at about $5bn. That would make the past years of grief worth every minute.
Blues square the series, Game III could then even trounce that.
