Overseas buyers are more likely to be interested in buying Channel 5 than domestic competition if Richard Desmond confirms rumours that the business is going up for sale, analysts say.
Speculation has raged since reports began trickling out nearly a week ago that the media tycoon was looking to part ways with the company after he bought it three years ago and turned its fortunes around.
Speculation in the Guardian included the possibility that any sale could spark a race between BT and BSkyB amid the former’s recent challenge to Sky’s domination over UK sports coverage.
However, TV programming intelligence analyst Tim Westcott, from global analyst firm IHS, told The Drum that domestic media companies could see problems on the horizon for any potential takeover.
“Some reports have pointed to ITV and BSkyB,” he said. “There are problems with both of those, one of which is common to both: Channel 5 is a public service broadcaster which has certain programming commitments and therefore quite a high cost base for operating the channel, even though costs have been cut quite considerably.
“There are various obligations, particularly about originated content, commissioning from independent producers, news and current affairs and prime time factual programming. While Channel 5 distribution is the same as every other channel on freeview – like ITV2, ITV3 and the Channel 5 digital channels – it has different programming obligations, which makes it kind of expensive for what it is, a free to air channel.”
Richard Desmond bought Channel 5 from Luxembourg-based RTL for £103m and promptly sacked the majority of the board alongside 80 job cuts from its 250 staff. Within three years, Desmond had massively increased the value of the business and brought it into profit. It’s thought he will be expecting offers in excess of £700m.
The consumer love for digital devices has brought new opportunities for TV and Desmond has set about exploiting them, but according to Westcott, there are stumbling blocks for Channel 5.
“A slight drawback is that they don’t own much of their programming because they’re a commissioner broadcaster,” he explained. “ITV has very successfully exploited the fact that it owns the rights to a lot of programmes it produces.
“ITV has not only sold its programme format to foreign broadcasters but it has also set up local production companies to make those programmes for other broadcasters – things like Four Wedding and I’m a Celebrity – and that makes a difference with digital. Instead of just renting someone else’s programmes, they’re making revenue.”
There are also significant competition issues for potential buyers like ITV or BSkyB to contend with. If BSkyB took over the business, its Sky TV sales operation would increase to around 29 per cent of the UK TV ad market, while any interest from ITV would likely be scuppered by regulatory intervention. The broadcaster currently controls around 45 per cent of the UK TV ad market and a buy-out of Channel 5 would bring that up to around 54 per cent.
“From ITV’s point of view it’s difficult to see why they would buy another channel, particularly because of their share of the advertising market and competition issues,” said Westcott. “It’s also difficult to see how Channel 5 would complement their other channels, and the money they would spend on it would be better used to reinforce the programming on their other digital channels.”
Westcott concluded that similar concerns from BSkyB may leave Channel 5 more likely to receive interest from a foreign buyer.
“It may be that a more likely buyer would just be a foreign media company that just wants to increase its share of the UK TV market,” he said. “And then you have all of the usual suspects - the major US media companies like Time Warner, which has previously bid for Channel 5.
“Time Warner does have some free to air operations in Europe, mostly in central and eastern Europe, they’re in developing markets. Foreign media companies look more likely than UK companies.”
Meanwhile others have questioned the overall value of Channel 5’s digital assets, with the majority of revenue still coming from broadcast TV. Enders analyst Ian Maude said: “They’re generating a bit of money from online advertising and I guess some pay but they are very small I think, minute, almost all their revenue comes from TV broadcast advertising. That’s potentially something they could expand, whoever buys it could maybe do something with it.”
Channel 5 could be a shrewd investment for BT, which has been an aggressive competitor to Sky since launching its BT Sport service in August.
According to the Guardian, BT is understood to have shown interest in the acquisition of Channel 5 last year but at a smaller value. However, the broadcaster has shown a willingness to outbid the competition of Sky and ITV for sporting rights to secure a bigger audience and increase its status on the market, and the acquisition of Channel 5 could provide the opportunity for BT to further position itself in the race.