Murdochs Next Houdini Trick?

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London -- Watching News Corp. chairman Rupert Murdoch
finesse seemingly impossible deals around the world has made for quite the spectator sport
among those in the industry over recent years.

But exactly how this television Houdini will manage to
realize his latest pipe dream -- his biggest ever -- is the cause of much speculation.

Through News' 40 percent-owned British Sky
Broadcasting plc direct-to-home platform, Murdoch is attempting to arrange a marriage with
one of Europe's most powerful media companies, France-based Canal Plus S.A.

Word surfaced of talks between Murdoch and Canal Plus chief
executive Pierre Lescure two weeks ago in the Financial Times. And last week,
sources indicated that negotiations between the two companies had gone beyond the
preliminary stages.

But squeaking such a media behemoth past European
regulators will likely require some very careful structuring, according to analysts who
are following the potential deal, even though a merged company might also curb the
ever-escalating prices for sports and movie programming.

Within the last year, the European Union quashed one big
pay TV industry union -- the merger of Germany's DF1 DTH platform and pay TV
programmer Premiere. That deal was killed because the two companies are owned by
practically every heavy-hitter media entity in Germany, and they have a few shareholders
from other European companies, as well.

More recently, Italian government officials deterred News
from investing in the Stream pay TV platform by passing legislation that would have
prevented Murdoch's company from controlling TV rights to the country's soccer
leagues -- a key ingredient for Stream's success, in News' opinion.

According to analysts, the options for Canal Plus and BSkyB
are varied.

Some contended that an outright merger into one company
could be the best way forward. BSkyB and Canal Plus would have large combined revenue, but
other media companies that operate mainly in their own national markets boast large
revenue, as well.

Nevertheless, regulatory eyebrows would still be raised
because the merged company would dominate pay TV across Europe.

BSkyB had 1998 revenue of $2.3 billion, while Canal
Plus' revenue for the year was $2.8 billion. For comparison, in 1997 -- the most
recent year for which data were available -- Luxembourg-based CLT-Ufa (which mainly
operates in Germany) had revenue of $2.67 billion; Germany's RTL had revenue of $2.14
billion; and Pro Sieben, also German, had revenue of $1.1 billion.

But an outright merger isn't the only way to go: The
companies could partner by investing jointly in areas such as programming and technology
or in countries outside of their home markets.

Joint investment in programming is one area that BSkyB and
Canal Plus could find particularly attractive. The cost of programming -- especially
sports and big-ticket Hollywood product -- has soared in recent years. News, for one, had
offered $2.53 billion for the TV rights to Italian soccer over the next five years.

BSkyB and Canal Plus could also "carve Europe
up," one analyst said. This could take the form of a nonaggression pact, under which
News and Canal Plus agree to concentrate on separate markets, he suggested.

The merger talks come at a time when Murdoch has been
largely unsuccessful in bashing against the door of the most lucrative pay TV countries in
Continental Europe, trying to expand as he has done in Latin America, Australia and Asia.

The failure to create a workable deal in Italy with Stream
was but the latest of several attempts to move onto the mainland, although News recently
invested in a small, women-oriented channel in Germany called TM3.

A deal with Canal Plus would be an extraordinary coup,
because that company dominates French pay TV, and it has major investments in Italy,
Spain, Poland and Scandinavia. News and Canal Plus had previously discussed the
possibility of News investing in Canal Plus' Telepiú DTH platform in Italy -- a
market of particular interest because it is one of the last major European countries that
is practically virgin territory for pay TV.

BSkyB and Canal Plus are hardly strangers to each other:
They're already related through some complex shareholder arrangements.

Canal Plus and its major shareholder, French utility
Vivendi S.A., own almost 25 percent of French media company Pathé S.A. Pathé, in turn,
owns 17 percent of BSkyB's shares. At the same time, News holds a 10 percent stake in
Pathé.

With these complex shareholding relationships, News could
end up controlling around 25 percent of a merged BSkyB/Canal Plus, with Pathé holding a
similar stake. Other shareholders would hold the balance.

Others suggested that BSkyB could invest in Canal
Plus' businesses outside of France, or that the firms could merge their
digital-technology businesses -- News Data Systems and MediaGuard, respectively.

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