Rupert Murdoch's News Corp. took a majority stake in Sky Deutschland AG on Monday, saying it would raise its holding in the German pay-TV company to 54.5 per cent from just under half in a capital increase.
The move comes as media conglomerate News Corp. separates its publishing and entertainment assets into two publicly traded companies following shareholder pressure to sell its troubled newspaper business and put a greater focus on the faster-growing TV companies.
It also follows an attempt in 2010 by News Corp. to snap up the 61 per cent of Britain's British Sky Broadcasting Group PLC (BSkyB) it did not already own. That deal was eventually scuppered by a phone hacking scandal at one of Mr. Murdoch's tabloid newspapers, but it indicated the group's intentions around pay-TV.
News Corp is hoping Sky Deutschland will turn out like BSkyB, which has amassed more than 10 million customers and grown adept at selling increasing numbers of services to them.
BSkyB posted a record full-year adjusted operating profit of £1.2-billion ($1.9-billion U.S.) in July, while Sky Deutschland has made a profit in only one year since it was founded in the early 1990s.
News Corp. so far has invested about €1-billion in Sky Deutschland. Last year it granted guarantees for half of the licence fee that Sky Deutschland is paying for rights to broadcast top-flight German football league matches.
"We suspect this is to drive aggressive growth plans," UBS analysts said of News Corp.'s move to increase its stake.
Sky Deutschland said it was raising a gross €438-million via a private placement with News Corp. and a rights issue – more than three times as much as had been expected and heightening speculation of a growth drive.
Sky Deutschland shares closed up 1.9 per cent at €4.689 ($6.28) after hitting their highest level in more than four years.
Sky Deutschland's channels can be received across Germany and by almost 91 per cent of Austrian households. But Germany is a tough market, where Sky competes with more than 30 free channels, making consumers reluctant to pay extra.
In the first nine months of last year advertising revenues amounted to €17.9-million out of a total of €976.4 million.
However, Germany's only pure play pay-TV broadcaster grew subscriber numbers by 12 per cent to 3.36 million and reiterated on Monday it expects to be profitable on an operating level in 2013, and grow strongly thereafter.
Under the plans announced on Monday, News Corp. will be able to consolidate Sky's earnings in its own figures.
A person familiar with News Corp.'s thinking said it could increase its holding further although it did not plan a full takeover for the group. Under German law, News Corp. is not required to make an offer for all outstanding shares.
News Corp. will buy 77.9 million new Sky Deutschland shares at €4.46 apiece, a 3-per-cent discount to Friday's closing price, accounting for €347.4-million of proceeds.
The rights issue, in which News Corp. will also participate, will launch soon after the private placement has ended, with a subscription price that would be no higher than €4.46.
The guarantee for Bundesliga football rights and the capital increase announced on Monday come on top of a €300-million credit facility backed by News Corp., €106-million in shareholder loans and a €165-million convertible bond.
News Corp. began building a stake in Sky Deutschland, formerly known as Premiere, in 2008 and has participated in several rights issues of the broadcaster.
Sky Deutschland's current chief executive Brian Sullivan took the helm in 2010 after spending around 14 years at BSkyB.
Merrill Lynch advised Sky Deutschland on the deal. Deutsche Bank advised News Corp.