What does Ericsson want with Red Bee Media?

Red Bee’s an interesting company, and one that’s very attractive for any large acquirer. From 2002 until 2005, it was known as BBC Broadcast Ltd (BBCBL), a commercial arm of the corporation that was famous, among other things, for its award-winning idents created for the broadcaster. Eight years ago, as part of Auntie’s drive to rid itself of overly commercial or non-core assets, BBCBL was sold to private equity consortium McQuarie for £166m and became Red Bee Media.

Since then it’s become one of those really great modern media companies that big corporations like to woo – interestingly diversified yet remaining within its core set of competencies; with an annual turnover of £135m; and with a client list to die for.

These clients include the BBC, Channel 4, BySkyB, Virgin, Orange, RTE, ITV, Canal +, Channel 5, Discovery, UKTV and others. Its activities include the creation of ads and idents, trailers, listings, subtitling (over 100,000 hours’ worth every year) and audio descriptions, translation, asset management and interactive TV services (including encoding for the iPlayer). Over the past few years it’s started to expand into Europe and Australasia via a few canny acquisitions, it’s a business with huge growth potential.

One aspect of Red Bee’s business that would have proved very attractive for suitors was its inevitably close relationship with its old parent. For all its propensity to shoot itself in the foot, and its recent series of high-profile PR disasters, the BBC remains the UK’s most important broadcaster, spending over £200m on distribution every year and is one of the world’s greatest media brands. Anyone in broadcasting (even, one suspects, Mr Rupert Murdoch), would like a business relationship with the BBC. Furthermore, Auntie pushes a lot of business Red Bee’s way. An exclusive 10-year playout and distribution contract, worth an estimated £500m, was recently extended for a further 18 months to 2017.

But even more attractive than its BBC contracts is Red Bee’s expertise, experience and its huge talent pool (it employs some 1,250 people in the UK); indeed, some observers reckon it’s one of the best teams of its kind anywhere.

Interestingly, Ericsson revealed publicly this week that it was Red Bee’s skills and expertise that prompted it to buy the firm, rather than its BBC contracts.

And why would a Swedish telecoms giant be so interested in a funky British media services company? Well, Ericsson is a giant. As well as being the inventor of Bluetooth, it is the world’s largest provider of wireless network equipment (with a global market share of just under 40 per cent), hold tens of thousands of patents and it used to have a mobile tie-up with Sony.

But as any astute telco or tech CEO knows, this isn’t enough. Bigness or market leadership is no guarantee of future prosperity. Doubtless spurred on by the examples of Apple (good) and Nokia (not so good), Ericsson’s management has been diversifying into services in recent years (since 2007); services, as we know, tend to have better margins than pure tech (unless, like Apple, you have a lot of vertical integration). At the same time it has been shedding legacy technology and defence system businesses.

Four of its more interesting acquisitions over the past six years give a good indication of Ericsson’s strategic thinking and where it sees much of its future. Its journey into media services began in 2007 when it bought Tandberg Television for $1.4bn, to become the world leader in broadcast compression technology and services. More recently (April), it announced its intention to acquire the Microsoft Mediaroom business, which will make it the world market leader in pay-IPTV (internet protocol television – essentially, on-demand TV streaming) systems, with customers including AT&T. This deal should go through before he end of this year.

Other acquisitions over the past year have been media R&D firm Telcordia Technologies; and Technicolor, which has itself diversified away from producing colour film to offering a range of media services. You can see where this is going, can’t you…

Ericsson’s head of broadcast services (again, another indication of the way the company is thinking) Thornsten Sauer believes that the deal – which is of course subject to regulatory approval - will benefit both parties. On completion, Red Bee will be incorporated into Ericsson’s Business Unit Global Services, where they acquired company will be able to tap into Ericsson’s 1,500-strong media R&D department. And, when that BBC contract comes up for renewal in four years’ time, it will be able to draw on the resources of its new parent. The deal is also good for London’s media scene, as Sauer says there will be a 4,000-strong “global media hub” for Ericsson’s UK business, based in the capital.

The acquirer, meanwhile, gets the media services talent and experience it was looking for, and a real presence in the lucrative playout and distribution market – which will only become more important as more content is “consumed” on a wider variety of devices, not just the telly in the sitting room.

And this is the point: Ericsson knows that the big growth area in media and telecommunications will be in the use of mobile devices (phones and tablets, as well as consoles like the X-Box and PS) to consume video content on demand, on the go. The Swedish company is spreading itself all over this space, occupying every niche. Expect more acquisitions, and soon…

Andrew Moss is a partner at Green Square, corporate finance advisors to the media and marketing sector.