BBC could be worth pounds 7bn in a sell-off
Mathew Horsman asks what Britain's biggest broadcaster would fetch if it came on the market; If digital terrestrial television takes off, the scope for pay-TV income will increase exponentially
Monday 12 February 1996
Its stellar library of programmes, totalling 135,000 hours, would be worth as much as pounds 1bn to a commercial company, according to the estimates. Factoring in a premium to reflect the value of the BBC's brand name, one of the world's most recognisable, a privatised BBC would easily dwarf the country's other commercial broadcasters.
The valuation exercise is based on a close reading of the broadcaster's public accounts, confidential internal figures and interviews with BBC insiders, media executives and merchant bankers. It may not be welcomed at the BBC, where the director-general, John Birt, recently completed painstaking discussions with the Government to ensure the broadcaster's continuing status as a public service corporation.
But with the growing fragmentation of the British television market, and the likelihood of a decline in domestic audience share, critics warn that the BBC's reliance on the licence fee to fund its operations may not be tenable beyond the early years of the next decade.
Both the Conservative and Labour parties insist that privatisation is not on the agenda. The BBC is seen as playing a central role in uniting the country, providing objective news and current affairs and a range of programming to suit all tastes. But the explosion in the number of subscription television services, notably the satellite and cable programming offered by Rupert Murdoch's BSkyB, has forced even the BBC's own internal advisers to warn of the unsustainability of the licence fee, at least in the long term.
Without the pounds 1.7bn it receives from television owners, the BBC would be unable to function. The options, according to media experts, are limited: either the corporation is granted the right to accept advertising or it competes for viewers' money by shifting all or the bulk of its programming to a subscription basis, collecting the equivalent of a "voluntary" licence fee.
Already, the BBC itself has embarked on a controversial programme of "commercialisation", aiming to top up licence fee income with additional revenues from programme sales, direct marketing of books, tapes and CDs, as well as its aggressive expansion into the pay-TV market through a global joint venture with the media and publishing giant, Pearson. It has also cut costs internally, in a controversial downsizing that has alarmed employees.
As part of its shifting view of the future marketplace, the BBC has even agreed to bend to government wishes, and privatise its transmission facilities. These are likely to raise as much as pounds 300m, according to City estimates, although the BBC itself has settled on a forecast of pounds 180m, according to informed sources.
The commercialisation of the BBC has developed in other ways, too. Even in its robust scheduling against the populist ITV, the BBC is seen as taking a more commercial view of the television market. While it continues to show current affairs and minority-taste programming in peak viewing hours, TV critics note an increasing willingness to go for audience share. More recently, the BBC floated the idea of launching subscription services following the introduction of digital terrestrial television, which the Government hopes to usher in by the end of the decade. For the first time, viewers would have to pay separately for certain kinds of programming - specialist sports, for example, or 24-hour news. The BBC insists, however, that any subscription service would be in addition to, and not a replacement for, the standard BBC1 and BBC2 services for which the licence fee is paid.
There are other signs of strategic shift, not least an aggressive move into Internet-related services, possibily in league with private-sector partners, and the diversification into satellite broadcasting in Europe.
At what point does "commercialisation" lead inexorably to "privatisation"? So far, Mr Birt and Bob Phillis, the architect of the BBC's commercial push, insist that the BBC's future in the public sector is secure. Mr Birt is understood internally to have articulated a grand vision of the BBC after the year 2000 - the virtual corporation. In Mr Birt's view, it is the creative talent of the BBC, and not the plant and equipment, that drives value. The corporation does not need to own all the elements of the "pipeline" provided it can continue to produce marketable content. But this stripped down service would remain in the state sector and meet its public service mandate.
Traditionalists are concerned that he may be willing to see much of the corporation's infrastructure sold off, placing the programming-making function at the core of a slimmed down television and radio enterprise - privatisation by stealth. Mr Birt's actions to date, coupled with the drive by Mr Phillis, head of BBC Worldwide, to penetrate new commercial markets at home and overseas, have sounded alarm bells within the corporation and in Parliament.
BBC Worldwide has been particularly active in the commercial arena. Last year, it had revenues of pounds 305m, of which pounds 81m came from the sale of BBC television programmes. In the Independent's analysis of the BBC's worth, these sales are a key element- not so much because of their size (still small, next to the fee revenues) but for what they reveal about the likely value of the whole programming side.
It is virtually impossible to develop a reliable picture of the corporation's value from its public accounts alone. Unlike private-sector companies, the BBC does not produce a profit and loss account. Moreover, there has been no attempt - at least not publicly - to calculate the worth of the broadcaster's extensive library and its gold-plated brand name.
Far easier to determine is what accountants call "tangible fixed asset value". A laudably complete list of land, buildings and plant can be had for the asking. It reveals that the BBC had tangible fixed assets at the end of March 1995 of pounds 878.4m, of which land and buildings made up just over pounds 400m. Plant and machinery (including broadcasting facilities) were worth another pounds 350m.
Key for any broadcaster is the amount invested in stock, including acquired programming and films. In the most recent accounts, these were valued at pounds 360m.
All told, the BBC's tangible assets topped pounds 1bn. For comparison purposes, Pearson, the media and publishing company, trades at about four times its net asset value. On this basis, the BBC might sell for about pounds 4bn.
On-going businesses include television, radio, magazine and book publishing, and videos and CDs. Again, the accounts do not allow a profit breakdown. One approach used by merchant bankers is to look at revenues and then gross these up by a standard factor to reach a ballpark value. According to the BBC's estimates of expenditure (the amount of the licence fee attributed to each part of the business), television had "revenues" of just over pounds 1bn, with BBC1 taking pounds 635m of this. Another pounds 350m was spent on radio, while head-office and administrative expenses were about pounds 190m.
On this basis, the core businesses might be worth about pounds 2.5bn, if the value is set at two and a half times "revenues" - the City's rule of thumb.
More reliable figures are available from BBC Worldwide, which had sales of pounds 305m last year. That suggests the commercial activities of the corporation may be worth about pounds 750m on their own.
But neither of these approaches takes account of the programming library and of the brand name, both of which would easily inflate the price.
BBC's joint venture with Pearson, UK Gold, features material from the BBC's extensive library. According to informed sources, UK Gold spends an average of pounds 2,500 an hour on programming. According to the BBC's own figures, the Worldwide operations earned pounds 81m from the sale of 14,500 hours of programming last year, for an average of about pounds 5,500 an hour. The likely average value of the total library, including current-year sales, could fall somewhere between these two figures.
For illustrative purposes, consider an average of pounds 4,000 an hour, for the 135,000 hours of available programming. According to analysts and bankers, the final figure should be grossed up to reflect the future value of the library. A realistic figure, which takes into account the value of the existing library and estimates of current-year production, easily tops pounds 1bn.
Recent programming deals by other broadcasters bear out this valuation. The SelecTV library, bought in January by Pearson, was valued at about pounds 3m, for just 300 hours of programming, or about pounds 10,000 a hour.
A value of four times net asset value, plus pounds 1bn for the library translates into a total price tag of pounds 5bn.
However, analysts expect a privatised BBC could do even better, given the value of the brand name. Disney is one of the few media companies with comparable brand recognition, and it attracts a premium of about 20 per cent compared with competitors. Using a similar premium for the BBC, the grand total reaches pounds 6bn, bigger even than high-flying BSkyB.
Another approach might be to apply the media sector's average price-to- earnings ratio and estimate the profits a company of the BBC's size would need to achieve to warrant the market premium. A p/e ratio of 25 times would not be out of line for a company of the BBC's stature, media analysts suggest. On that basis, it would have to earn about pounds 300m a year in pre- tax profits to warrant a stock market capitalisation of pounds 6bn.
The commercial activities of the BBC generated "net benefit" of pounds 54m last year, on revenues of pounds 305m, for a return of nearly 18 per cent. Considering that the BBC had total revenues last year of pounds 2bn (including licence fee income), then the target of pounds 300m (or a rate of return of 15 per cent) looks achievable.
But is it? The great challenge to a privatised BBC would be to replace licence fee income with commercial income. The total advertising revenues of the ITV companies and Channel 4 last year was about pounds 1.8bn. How much of that can the BBC steal away? And what effect would advertising have on the BBC's quality and reputation? Other countries - notably Canada - have allowed their public-sector broadcasters to accept ads, but they continue to struggle for audiences and money.
Pay-TV might be a better avenue, as Sky Television, which has subscription revenues of about pounds 1bn a year, has shown. Can the BBC really hope to convince viewers to pay for its services?
Much will depend on how the television market evolves in coming years. If, as many expect, digital terrestrial television takes off, then the scope for generating subscription income will increase exponentially.
With its excellent name and track record, surely the BBC would emerge as a leading contender for the crown of Britain's leading commercial broadcaster.
Suggesting that privatisation could work is not the same as saying the BBC ought to be privatised. But the changing face of television will force some kind of reaction from politicians and the corporation's own administrators.
The BBC Charter is safe for now. The licence fee will continued to be paid. For how much longer?
EARNINGS TRACK RECORD
License fee income pounds 1,751.3m
Open University pounds 12.5m
Commercial turnover pounds 305.1m
Other income pounds 39.8m
Total pounds 2,108.7m
Television programme sales pounds 81.1m (14,500 hours)
Magazine and book publishing pounds 117.5m
Videos, record and tapes pounds 51.2m
Satellite income pounds 31.2m
Other activities pounds 24.1m
Total pounds 305.1m
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