The Shoeshine Column: Why Telecom bought into newspapers

Friday 26th May 2000

Sky TV's destiny is controlled not by its shareholders but by INL's

Some imbecile forgot to post Shoeshine's invitation to last week's Platco jamboree in New York.

This is a shame because, like all the other shareholders in Sky Network Television, Shoeshine would have appreciated the opportunity to do a bit of shopping and ask Rupert Murdoch whether Sky is included in his latest scheme.

In the event Rupert was represented by his son James who painted a broad outline but failed to come up with some important details.

These included a commitment to actually go through with the project which would draw together News Corp's far-flung pay television interests.

If anybody there knew where Noo Zealand was it didn't occur to them to ask how we might fit in.

The void this information has left has sparked the inevitable speculation.

Shoeshine has also been pondering all this. It's taken a while but he has finally come up with a conspiracy theory that fits all the facts.

Sky's 49.5% owner, Independent Newspapers Ltd (INL), says it hasn't yet heard from its major shareholder about Sky and Platco and at first blush it looks as if inclusion could fall into the too-hard basket.

For one thing Sky, with around 340,000 subscribers and a market capitalisation of around $1.5 billion, is tiny in comparison to Platco, which has been valued at $US36 billion ($78 billion).

That doesn't of itself mean News won't be keen to include it.

The proposed entity embraces, for example, 11% of Japan's PerfecTV, with 2.5 million subscribers, minority stakes in Sky Brazil and Innova in Mexico, with one million subscribers between them, and start-up operations in Colombia, Chile and Argentina.

In fact it would be downright anomalous if News didn't manage to gather all its pay TV interests under the Platco hat.

But Sky is a bit of an oddity in the News constellation because the Murdoch vehicle doesn't own a direct stake. Instead its interest is via a 49.6% holding in INL.

All the other bits being hocked into Platco are directly owned, even if some are minority stakes.

As things stand News can only include Sky in Platco by sticking in its INL shares.

But that would give Platco newspaper assets, a bizarre outcome as the intent is to get the new media stuff valued separately from the old economy stuff.

This situation could be remedied simply by arranging for INL to sell its Sky shares to News.

It's a moot point whether that would give Sky anything it didn't already have but it would do nothing for INL.

The media group's market valuation owes much to its exposure to Sky, which is growing much faster than the newspaper business.

It would be a major transaction with a related party needing ratification by a majority of INL's other shareholders and it is unlikely this would be forthcoming - especially as Telecom now owns 10%.

Telecom's buyin came out of the blue and at first puzzled market analysts. The carrier's line was that it was taking "a small strategic position" to allow it to "build a closer relationship over time."

Analysts saw some value in a relationship that might allow Telecom to access INL's newspapers for its Xtra internet-service provider.

But that never looked like a strong enough reason for spending $165 million on a stake. INL's Mike Robson has conceded people won't pay to read newspapers online.

A much more likely explanation is Telecom's interest in Sky, which goes way back.

Five years ago it sought a direct equity stake that would allow it to put pay TV content on its aborted cable television network.

The suspicion is its INL move is driven mainly by the desire to bundle Sky's pay TV content with its voice and data services, and, maybe, to carry them on the ADSL (asymmetrical digital subscriber line) service.

That suspicion was borne out two weeks after Telecom bought its initial INL stake when it announced it had signed a bundling agreement with Sky.

The deal counters a threat from the newly formed Telstra Saturn, which is building a national broadband network capable of carrying TV, voice and data.

Had Telecom bought a direct Sky stake it would not have been entitled to vote on what INL did with its Sky shares and the way would have been clear, subject to INL minority shareholder ratification, for INL to sell them to News Corp.

A further 11% of INL's stock is held by Craig Heatley and Todd Capital, whose appearance on the share register last October caused as much puzzlement as Telecom's foray.

These two are aligned with News Corp through eVentures but so is Telecom.

The cuddly relationship could turn cold if News tries to ram through a Sky sale.

It would need 25% of INL's votes, and Telecom, Todd and Heatley have 21%.

If the major Sky stake had disappeared off into Platco Telecom would have lost any ability to influence Sky's deals and the broadcaster's pay TV content could even have ended up on Telstra Saturn's network.

It's only a theory but it does explain the sudden enthusiasm for INL's shares.

Some may have difficulty believing Telecom is so far-sighted or devious.

Its reason for buying into INL could simply have been that, as INL's Robson put it, the picture is changing so fast it's as well to have a foot in every camp.

It doesn't really matter. If News - or anyone else - wants Sky it will have to talk to Telecom.

Telecom needs content and will protect its valuable bundling agreement with Sky in any way it can.

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