Telecom's Sky strategy cloudy

By RICHARD BRADDELL

Telecom has bought itself a seat on the Sky Television board for just under $200 million - a move that has puzzled some analysts.

Less than a week after it failed to secure a slice of the country's largest pay-TV operator, Telecom succeeded in persuading Tappenden Holdings to sell its 12.1 per cent stake in Sky for $192.6 million yesterday.

Telecom is believed to have initially offered about $4 a share, and agreed yesterday to pay $4.12.

Analysts and industry players said they believed the move was a defensive ploy to fend off a full takeover.

The Tappenden stake is said to have been on the market for some time and may also have been offered to INL, which is controlled by Rupert Murdoch's News Corp.

Telecom may have wanted the stake to prevent Australian pay-TV operator Foxtel from buying in. Foxtel is jointly controlled by Telecom's Australian rival, Telstra, and News Corp.

Sky chief executive John Fellett said the purchase would not result in Sky doing anything to favour one shareholder at the expense of another.

Mr Fellett noted that Sky already had distribution arrangements with Telecom, TelstraSaturn, Meridian and Holden.

It would continue to make deals with Telecom, "but we will not do deals if they don't make sense, short of them buying 100 per cent," he said.

Nevertheless, the transaction will give Telecom a greater measure of influence than it receives through its 10 per cent stake in Sky's 47 per cent shareholder, INL.

It is likely to take over the board representation of Tappenden Holdings, which is controlled by businessmen Alan Gibbs and Trevor Farmer.

The move will also harden battle lines in the converging telecommunications and media industries.

TelstraSaturn chief executive Jack Matthews said: "To the extent that Telecom influences Sky, it just adds more impetus to our strategy that we have to get more aggressive in acquiring programming."

Telecom explained the move by saying it wanted to be a leader in the convergence of online entertainment and telephony.

Spokesman Martin Freeth said: "I would have to say it's in the context of getting the right relationship in place with some of the key players in terms of the convergence we all understand is coming."

Last week, Telecom and Sky announced plans to extend a partnership that has been offering joint telephone, internet and television services for the past year. The pair will offer the services nationally for at least two years.

UBS Warburg analyst Paul Richardson said the equity markets would not like the move.

"But most people in business around the board table say these are things you have to do to cement relationships," he said.

Paul Robertshawe, New Zealand equities manager for Tower Asset Management, said it would take some "serious logic" to justify Telecom buying more shares in the near future.

"I'm looking forward to hearing how they expect to leverage this stake," he said.

Analysts were also concerned that Telecom might need to spend billions of dollars if it was successful in bidding for Australia's second-largest telecommunications company, C&W Optus.

Sky shares fell 10c to $3.75 before the announcement, which was made after the market closed. Telecom fell 12c to $5.22.

The Commerce Commission said it would look at the implications of the acquisition for the telecommunications market, though it would not conduct a formal investigation.

In 1995, the commission cleared a proposal for Telecom to buy an indirect stake in Sky that was vigorously opposed by rival telecommunications companies. The objections were rejected after a long court battle but by then Telecom had decided not to proceed.

Analysts said the price paid by Telecom was acceptable given the strategic nature of the parcel, Sky's expanding subscriber base and the strength of the New Zealand dollar, which reduces the US-dollar-denominated cost of its programme purchases. Although Sky fell to a low of $2.60 in November, it placed 20 million shares in August at $3.99 a share.