Outlook: Comcast's Fantasia bid for Walt Disney Corp

Economic nirvana?; BSkyB's dividend

Like a bad penny, the age of the mega-merger has returned. Almost exactly four years to the day after AOL and Time Warner marked the top of the boom with one of the most disastrously misconceived mergers of all time, Comcast, the US cable operator, seems to be attempting something not so dissimilar with its $5obn bid for Walt Disney Corporation.

Michael Eisner, Disney's long serving chairman, may thoroughly deserve his fate at the wrong end of a hostile takeover bid ­ in recent years, the company's performance has been abysmal ­ yet Comcast's attempted embrace looks even less rooted in reality than Fantasia and Mickey Mouse. Both Comcast and Disney are substantial companies with big revenue streams, so the takeover may not be quite as much flight of fancy as AOL's candyfloss bid for Time Warner. But the thinking that underlies it is much the same. Brian Roberts, Comcast's chief executive, dreams of an empire spanning cable, film, network TV and theme parks. As an integrated distribution and content company, he believes the new behemoth will be supremely well positioned to meet the challenges of the changing media landscape. Tosh.

The giveaway is in the penultimate paragraph of his letter to Mr Eisner where, in an attempt to waylay any fears of regulatory obstruction, he admits that programme access and carriage rules ensure that the combined company must continue to make all its interests available on a non-exclusive, non-discriminatory basis. There might be some merit in the marriage of two such alien ends of the media industry if Mr Roberts could somehow confine Disney content to his own cable networks, thus improving their attractions, but he can't because the rules don't allow it.

Instead Comcast will become an unmanageable collection of unrelated media assets that would be highly likely to sink under the weight of its own infighting and conflict of interest. The industrial megamerger has been so often discredited as folly that you would think that by now managements and investors would have learned their lesson. Yet even as the misguided mergers of one generation are being dismantled, there's already a new one growing up, all too willing to listen to the siren calls of Wall Street's fee hungry investment bankers. Assuming Mr Roberts improves his terms, he'll probably succeed, but I guarantee he lives to regret it.

Economic nirvana?

Mervyn King, Governor of the Bank of England, has made little secret of his distaste for the Government's new inflation target, but like it or not, he's lumbered with the task of meeting and explaining it. The awkward question of why interest rates are rising when inflation is so far below the new target therefore falls to him to answer.

And no, it's got nothing to do with the contention that monetary policy has become more concerned with soaraway house prices than inflation, Mr King insisted yesterday as he introduced the Bank of England's latest Inflation Report. Rather, the explanation lies in above trend GDP growth, which in time will lead to capacity shortages, thereby increasing the amount of inflation in the economy.

If interest rates had been left unchanged after last week's meeting of the Monetary Policy Committee, then there would be a high probability of inflation being above the new, 2 per cent target two years hence. By raising rates to 4 per cent, projected inflation is returned to target. The reason why inflation was broadly on target under the old measure, but is currently under it on the new one is that the old measure takes account of house price inflation, while the new one doesn't. Exactly the same inflationary pressures exist around the two targets, whatever measure you use. Get it? Oh, never mind.

Despite these presentational difficulties, Mr King's underlying message was the most upbeat it's been in years. Whatever the Government's difficulties over Iraq, top-up fees, foundation hospitals and so many other aspects of domestic and foreign policy, the outlook for the economy seems to get better and better. The good news yesterday is that despite the likelihood of above trend growth of 3 per cent or more for the next two years, interest rates won't need to rise very far to keep inflation in check.

One of the most instructive charts the Inflation Report has to offer is the one that projects inflation if market expectations of interest rates are met. The City consensus is that the Bank's official rate will be 4.5 per cent by the end of the year, rising to perhaps 4.8 per cent by the end of next year. According to the Bank inflation would be consistently under target, even with growth at over 3 per cent, if those interest rates were applied.

What might happen to cloud this extraordinarily benign outlook? Obviously, the Bank's projections are highly vulnerable to setbacks in the world economy but, on that front too, things look better now than they have in years. The most likely upset, therefore, comes from the possibility that house prices and consumption continue to boom, rather than abate as the Bank expects.

Mr King looks forward to "a long overdue" rebalancing of the UK economy, with growth coming more from investment and exports than from debt fuelled domestic consumption. But what if that doesn't happen? The possibility last year of recession and worst didn't seem to affect the housing market, or deter the "shop till you drop" propensity of the British consumer, so goodness knows what the current prognosis of never ending above trend growth is going to do to sentiment. If boom conditions return to the high street and housing market, then interest rates will need to go a lot higher than the present City consensus.

BSkyB's dividend

Even BSkyB's house broker didn't expect the immediate resumption of dividend payments at the pay-TV company, so it is tempting to see yesterday's declaration of an interim payout ­ the first for five years ­ as deliberately engineered to ease the path of the new chief executive, James Murdoch, and appease City institutions still angry over his appointment. Nonsense, says the company. We always said we would resume dividend payments once investment grade had been regained and court approval had been given. Both pre-conditions were met late last year.

Nor is the 2.75p declared yesterday likely to break the bank. Even assuming a bit more for the final, the shares would still yield less than 1 per cent, which hardly puts them in the category of a utility stock. None the less, the payment does carry a certain symbolic significance, in that it demonstrates that after the row over James Murdoch's appointment, the board is at last listening to the wishes of outside shareholders.

The non payment of dividends was the right policy for the land grab race of the digital revolution, but now that Sky has won the battle and completely slaughtered all rivals in the process, investors have begun to demand at least some of the now fast growing freed up cash flow. Rightly or wrongly, the suspicion is that the boss of bosses, Rupert Murdoch, favours a second, costly push for more subscribers, taking the total to above 10 million, even if that means abandoning the company's shorter-term targets for average revenue per subscriber.

This would be entirely in character. Mr Murdoch senior is much more interested in long-term empire building than returning short-term value. So what does the son think? For the time being, he's sticking to the pre-existing targets of 8 million subscribers and £400 of average revenue per subscriber by the end of next year. Wisely, he's keeping his counsel on what happens after that, but he does promise new targets before the old ones are met.

Even with the unexpected success of Freeview, Mr Murdoch junior believes pay TV will reach penetration rates of more than 80 per cent of households in 10 years ­ nearly double what it is now. The new man in the hot seat wouldn't be doing his job if he didn't plan to take most of that growth. James may seem to speak the City's language better than his father, but Sky may remain largely a jam tomorrow company for some years yet.

jeremy.warner@independent.co.uk

Comments