Corporate Profile: No profits, but plenty of vision

In a decade, Flextech has grown from a minor oil services company into a major media firm. But is it really a bigger player than Carlton or Granada, as its new boss claims?

THE WEEKEND launch of free digital decoders by ONdigital and BSkyB has instigated a price war in the pay-TV sector, but for multi-channel provider Flextech the development is likely to prove an unalloyed benefit.

With 13 channels in its portfolio, including repeats favourite UK Gold, Flextech will profit from the growth of digital TV since virtually all pay-TV subscribers, regardless of how they get the signal, will be watching some of its channels.

The digital price war may result in some casualties among the platform providers. But forprogramme suppliers such as Flextech, it could herald the same kind of explosion in demand that the mobile telephone industry experienced last year following the launch of pay-as-you go phones.

The more viewers digital television attracts, the greater become Flextech's subscription revenues and its income from advertising.

The Flextech story goes back little more than a decade when it was an oil services company and the British multi-channel television industry was in its infancy. Sky Television and British Satellite Broadcasting were newly up and running, providing competing satellite packages that gave paying viewers an additional handful of rather low quality channels in addition to BBC One and Two, ITV and Channel 4.

At the same time that Sky and BSB were losing almost incalculable sums in their battle for satellite supremacy, a likeable chartered accountant and former investment banker named Roger Luard was looking for a way to build a media business to offset the Flextech's dependence on the ups and downs of a volatile oil sector.

Unlike Rupert Murdoch, who only turned to satellite after failing to win control of London Weekend Television during the 1970s, Mr. Luard, who joined Flextech in 1986, initially set his sights on building up a position in the multi-channel pay television market.

Starting with The Children's Channel, Flextech began buying stakes in pay-TV, often getting assets on the cheap as bigger companies sold out. Luard's unshakeable belief in the growth potential of pay-TV in Britain - the product of having studied the U.S. and European markets - wasn't matched by many other UK broadcasting executives.

Flextech also dabbled in the risky cable sector, paying pounds 300,000 for a handful of franchises, which were ultimately sold on for pounds 65 million when North American telecoms and cable operators began descending on Britain in 1992.

Flextech's small capital base - in the order of pounds 14 million around 1990 - couldn't measure up to the financial muscle behind satellite. Nor could it hope to be a major player in cable, given the pounds 12 billion that it would cost to build a fibre-optic and co-axial network to connect 15 million homes.

Programming, however, was different. There were, Mr Luard realised, relatively limited upfront capital costs. It was also amenable to the would-be media magnate's well tuned deal-making skills.

Fast forward to 1999 and Flextech is one of only two established UK players in the multi-channel TV sector. Even though it's pounds 1.4 bn market capitalisation is dwarfed by BSkyB's pounds 10 bn value, Flextech has most of the non-premium British channels included in `basic' cable and satellite channel packages. Its 13 owned and operated channels include UK Gold, Bravo and Living.

They are relatively low cost, stable earners without the mammoth financial gambles incumbent in bidding for TV rights to sports events like Premier League football.

As Mathew Horsman documented in his 1997 book, Sky High: The Inside Story of BSkyB (Orion), Mr Luard understood value in pay-TV when others, particularly executives at television companies like Thames and Central, did not. That was first shown when the Flextech boss bought an initial stake in The Children's Channel (TCC) for pounds 1.5m and took control of 75 per cent for pounds 6.7m. The wisdom of that move was evident when US cable giant Tele-Communications (TCI) paid pounds 5m for a 25 per cent stake in TCC.

If the deal proved the residual value of programming, it also served to introduce the fledgling media entrepreneur to the company and managers that would ultimately buy control of Flextech, back Mr. Luard and bankroll the company's long-term expansion.

From the late 1980s, America's cable czar, John Malone, builder and head of TCI, and Fred Vierra, his UK programming executive, began looking to acquire channels that could be distributed over satellite and the British cable television network, then in the early days of construction. Like Mr Luard, the TCI executives, who also included Adam Singer, the current chairman and chief executive of Flextech, were convinced that pay-TV offered lightening fast growth as Britain went down the highly profitable path already trodden in North America.

"Roger was one of the best deal makers I've ever met," recalls Mr Singer, who succeeded Mr Luard after his untimely death, aged 49, from a neurological disorder in August. "Roger did the deals and I ran the company. Roger was the foundation of Flextech." Mr Singer also brought sterling qualities to the company, ranging from stints with the BBC, Viacom and five years with TCI International.

While TCI invested heavily during the early 1990s in cable network construction, building what would ultimately become Telewest Communications, now the number two UK cable company, it also set up a British programming arm called United Artists Entertainment Programming under Mr. Vierra. UAEP did a number of deals with Flextech, while also distributing US channels like the documentary channel Discovery. Then in 1994, UAEP's programming and other assets were inserted into Flextech in return for a 60 per cent interest in the company. That set a rocket under Flextech's share price and gave it the critical mass to play a convincing number two to BSkyB's lead.

By conventional financial measures, Flextech presents an odd picture. It doesn't make a profit and since becoming a media company has never paid a dividend, characteristics it shares with TCI. In 1998, sales grew 26 per cent to pounds 127m and pretax losses more than halved to pounds 6.2m. Though the rate of annual sales growth has slowed from the 50 per cent plus rate recorded throughout much of the 1990s, the company's operational gearing means that expanding revenue streams will mostly flow to profits.

As that message has got through, Flextech shares have been on a roll, and at 867p Tuesday have nearly doubled over the past year.

That trend has been helped by the ongoing growth of multi-channel television, which now enters over 6.7 million UK homes through either satellite, cable or digital terrestrial. As Mr Singer points out, with some 17 million British households still not connected,"there's a lot of potential for us to grow a lot more".

Whether the company manages to make a profit this year will depend on what investment opportunities arise. In March, it unveiled plans to double 1999 capital spending to pounds 20m on transactional and interactive services. An entertainment guide called SceneOne, already popular with online users, is due to debut as a digital satellite television channel later this year.

"The positioning of the company is becoming increasingly visible as one of the key providers of software in the broadband market," says Carlo Campomagnani, media analyst with Lehman Brothers. "It's a platform neutral company with very focused audience groups, and is extending into transactions linking products and services with those users."

In addition to websites linked to many of its television channels, Flextech Interactive has an alliance with Freepages Group, a UK interactive services company with a wide range of business data bases operating under the Scoot trading name. The interactive unit has also developed an electronic programme guide for Cable Guide, the cable TV listings magazine mailed to 1.6 million homes monthly.

Flextech also operates UK Travel Shop, an interactive channel that allows cable viewers to directly book package holidays through their television, and Screenshop, a home shopping service.

Clearly, Mr Singer is intent on leveraging Flextech's strategic position in pay-TV into a comparable Internet niche. Given the group's track record few would bet against him succeeding.

"It's interesting that Flextech, which has come from nowhere is a more significant player in satellite and cable, than is Carlton, United News & Media or Granada," he observes. "I do think we have a strategic position they quite envy."

That envy was undoubtedly shared by BSkyB executives in 1997 when Flextech agreed a 30-year joint venture with BBC Worldwide, the broadcaster's commercial arm, to develop and distribute new digital subscription channels known collectively as UKTV.

The package includes music and comedy offering UK Play as well as other lifestyle and entertainment channels such as UK Arena and UK Horizons. Flextech allocated pounds 140m over several years to create the channels and the BBC, with backing from TCI, secured a distribution toehold through US cable networks.

The benefits of scale (and in Liberty a big US corporate parent) make it likely that Flextech will continue to exert what Mr Singer calls a "gravitational" pull on other channels. He is believed to be looking at the possible acquisition of cable-only channel L!veTV from the Mirror Group as well as the three pay-TV channels operated by Granada Sky Broadcasting.

"Everybody faces the same issues of scale and cross-promotion," says Mr. Singer, while declining comment about any acquisitions. "Clearly if you have 12 channels you're in a better position than if you have three. I think you'll see us increase our portfolio."

Flextech Facts

Market Cap: pounds 1.4bn

Shareholders:

Liberty Media - 36%; Cox Communications 13%; MediaOne Group 7%; Capital Group 5%; Pearson 3%

Chairman & Chief Executive: Adam Singer

Managing Director: Brent Harman

Finance Director: Mark Luiz

Channels: Controlled and managed

Bravo; Challenge TV; Living; Trouble; TV Travel Shop; HSN Direct; Screenshop;

Channels: UK TV venture with BBC

UK Gold; UK Arena; UK Play UK Horizons: UK Styke

Broadcast Shareholdings:

Scottish Media Group (19%); Kindernet (31%); Sell-A-Vision (50%)

Facilities:

Maidstone Studios (100%)