Fool's Eye View

[ December 6, 1999 ]

A Tele-tastic Day

By Rob Davies (TMFEssex)

In can't be too often that one sector dominates Breakfast, Lunch and evening news in one day. But that is the case today. First, we had news of Ask Jeeves cutting a deal with a major UK media company this morning. Then we had BSkyB (LSE: BSY) throwing Deutschmarks into Germany to get a stake in TV there and finally, at lunchtime, we had the news that Flextech (LSE: FLXT) and Telewest (LSE: TWT) are considering merging their businesses.

What is going on?

It, dear Fool, is the long-awaited consolidation of the UK media, but basically the TV sector. As was discussed in a recent Sector Dissector the sector has a surprisingly large number of players in it, yet all are dwarfed by BSkyB -- the industry leader in size, if not in profitability. The minnows in the pond need to get together to get some critical mass. And that is what today's news is about. One feature that seems to unite all the players is low profitability, but lusty stock market valuations.

The two players being considered here are classic examples. Telewest has a market capitalisation of £7,700m, yet has never made a bean in its life. Mind you, its valuation was substantially less a few months ago when it was trading at close to 200p rather than the elevated heights of 350p where it is today. Its putative partner is valued at £2,195m and as far as I can discover has never reported a profit either. It lost £2.9m before tax in the six months to June this year.

Telewest is a cable company and, like all those of its ilk, has poured a fortune into digging-up perfectly good roads and stuffing shiny new optic fibre cables into the resultant cavity. Until now these cables have carried analogue signals, but they are now being prepared to take digital TV. Once that happens, and the cables become broadband (the ability to take more than one signal at a time) the number of channels available to the punter will increase enormously.

That is all well and good, but you need content to fill all those cables up. And that is where Flextech comes in. The company is the biggest supplier of thematic channels to the UK multichannel TV market. It owns Living, Bravo, Challenge and Trouble and, through UKTV its joint venture with the BBC, it has developed these pay-TV channels: UK Style, UK Arena, UK Play, and UK Horizons and UK Gold.

It also owns TV Travel Shop and its most recent deal was to sell a 38% stake in it to Barclays Private Equity for £20m, putting a value of £52.6m on the whole business and leaving Flextech with 49%. The extraordinary thing about the deal is that the business is only 18 months old, not bad for creating shareholder value in a short period.

Just prior to that the company took a 77.5% stake in a company called Way Ahead for £7.2m. This is the UK's leading rock and pop ticketing agency and is a good fit with all those pop videos which seem to fill 6 out of every 5 channels on our TV. But with teenage kids what hope do I have of watching BBC Parliament today? But most significantly, this will be an excellent fit with its Sceneone interactive guide to entertainment on the Internet and soon to be on interactive TV.

Even though Flextech is small -- £62.5m of revenues in the first half of the year -- it is growing rapidly, advertising revenues increased by 30% in the six months to June. And it keeps cutting deals. At the same time as the interim results it agreed to buy a 25% holding in Multi Media Mapping for £1.9m. The interim results were in fact below forecasts because the switch to digital from analogue was faster than predicted. Because it was offering discounts to switch, and because it lost some analogue capacity, the company generated less revenue than it might have done. So far it is extracting about £20 from each of its 6.5m households that are wired up.

Despite the youth of interactive TV Flextech saw domestic interactive revenue rise to £5.6m from £0.8m in the first half of the year, mainly from the TV Travel Shop. Interactive advertising added another £377,000 in revenue.

The announcement today is really an extension of a major carriage agreement that Flextech made with Telewest a few weeks ago. Now it looks as if they will go the whole way. Whether that precludes it from using the other companies, basically NTL and BSkyB, is not clear yet. And hanging over the whole sector is the threat of interference from the DTI and the various regulators. How that will all pan out is anyone's guess. Moreover, in the midst of all this is the row over the additional digital poll tax we are all going to have to pay to fund the BBC's ambitions.

Just to show you I do watch BBC Parliament, I did catch Tony Hall of BSkyB taking questions from Gerald Kaufman at one of the committee sessions. They were both musing on the point that BBC News 24 seems to cost an order of magnitude more than Sky News. Yet the BBC can piggyback off its enormous worldwide network, which should give it a significant cost advantage. Very odd. The other issue was who actually said the BBC could use our licence fees to develop its enormous, but very good, website?

Methinks the cosy world of TV is going to get very bumpy indeed. Tell us what you think on the Fool's Eye View message board or the Media board. Nevertheless, this vehicle seems to have good ground clearance.