December 9, 2016 / 11:50 PM / 8 months ago

In Sky deal, Murdochs shield Fox from sagging U.S. ad market

Media mogul Rupert Murdoch leaves his home in London, Britain March 4, 2016.Stefan Wermuth

(Reuters) - Twenty-First Century Fox Inc's (FOXA.O) plan to buy the remaining stake in Sky Plc (SKYB.L) further insulates the Murdoch family-owned media company from a U.S. television advertising market roiled by sagging ratings, experts said.

In a highly-anticipated move, Rupert Murdoch's Twenty-First Century Fox struck a preliminary deal on Friday to buy the 61 percent of British pay-TV firm Sky Plc SKY.L it does not already own for around $14 billion.

Owning Sky would give Fox, whose cable networks include Fox News and FX, subscription revenue from a pay-TV network spanning 22 million households in Europe, a market which has not been as affected as the United States by cord-cutters who drop cable subscriptions in favor of online subscription services.

What Fox does with the technology and expertise that Sky can provide will be particularly important for the company, given it does not have its own U.S.-based direct-to consumer offering, said Tim Nollen, an analyst with Macquarie Research.

"Just like all of the U.S. networks, Fox faces questions around the longer term value of pay-TV subscribers," he said. "Fox could use Sky to be the centerpiece of a global distribution strategy."

Fox's planned acquisition of Sky comes at the end of a strong year for ad sales across the industry largely due to the U.S. presidential election and the Rio Summer Olympics.

In its 2017 fiscal first quarter, the company said domestic ad revenue for its cable networks grew by six percent from the same quarter last year.

But analysts predict that next year will be tougher for ad sales. While national television ad sales were up 1.7 percent this year, they are expected to drop 0.4 percent in 2017, according to Pivotal Research. Similarly, Pivotal forecasts that cable television ad sales will be down 0.8 percent in 2017, after a 1.2 percent rise this year.

If the deal for the remaining stake in Sky goes through, 36 percent of the combined company's estimated 2017 revenue would come from cable network programming, down from 56 percent, according to a note by Stifel on Friday. Meanwhile, cable network programming would account for 56 percent of earnings before interest, tax, depreciation and amortization (EBITDA) in 2017, down from 78 percent.

The deal would help lessen Fox's dependence on its Fox News Channel for revenue, analysts said.

Also, the sudden departure of Fox News Chief Executive Roger Ailes following widespread allegations of sexual harassment, highlighted to some investors the potential risks associated with Fox News, said Brian Wieser, an analyst with Pivotal Research. At the time, there was concern that his departure would result in a loss of key talent.

Fox News contributed $1.34 billion in EBITDA, or 20 percent of Twenty First Century Fox's total EBITDA in fiscal 2016, according to estimates by Anthony Di Clemente, an analyst with Nomura. However its viewers, like many of its competitors, tend to be older, with a median age of 65, higher than MSNBC and CNN, according to Nielsen data.

While Fox News, known for a lineup of politically conservative commentators, continued to be a ratings juggernaut, its ratings, like all cable news channels, are expected to wane in the wake of the election.

"Fox News clearly faces a cyclical weaker year ahead just coming off the election," Nollen said. "This creates a bigger, more diversified business."

Additional reporting by Tim Baysinger; Editing by Anna Driver and Andrew Hay

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