Flextech, which is currently owned by the cable company Telewest, owns a series of digital television channels including Living, Challenge and Bid Up TV, but its most valuable asset is its 50 per cent share of UKTV, which it owns jointly with the BBC. UKTV has exclusive access to the BBC library and owns a series of digital channels, the most successful of which is UK Gold. So whoever buys Flextech becomes pretty powerful in the world of pay digital television.
The reason that Flextech is likely to come on the market soon is that what seem like the longest merger discussions in British history, those between Telewest and NTL, are coming to a conclusion. Britain's two remaining cable companies are likely to become one entity later this year, which is likely to trigger the sale of Flextech.
All sorts of organisations - Sky, Viacom, ITV, Channel Four, Channel Five, Discovery and numerous private equity companies - are interested in buying Flextech because they recognise that this is the largest grouping of pay channels likely to become available in the UK for many years.
However, apart from the price, the problem all the would-be buyers of Flextech face is how to make themselves attractive to the BBC as the BBC could end up deciding who buys Flextech. It is widely assumed that Flextech will come up for sale for a couple of reasons. Firstly, the owners of Telewest think it's worth more than NTL thinks it is, and the only way they can prove that is to sell it. Secondly, the management of NTL is not keen to be in the channel business and is likely to dominate the merged company. But even if the new combined entity decides it wants to keep Flextech, it could still be forced to sell Flextech's 50 per cent share of UKTV by the BBC.
Assuming the bigger of the two cable companies buys the other, which means NTL buys Telewest, it triggers a change of control clause in UKTV which means that BBC Worldwide can buy Flextech's stake. While the BBC hasn't got the money to buy the stake itself and probably wouldn't want to own the whole entity anyway, if the merger goes through, the BBC can force a sale of Flextech's share of UKTV and choose the buyer, as long as its nominated partner is prepared to pay the asking price. The new cable company could sell UKTV and keep the rest of Flextech, although this is unlikely as the two are worth more sold together.
So who should buy Flextech? Sky would almost certainly be the only potential bidder ruled out on competition grounds, but for the owners of the terrestrial commercial channels - ITV, Channel Four and Channel Five - it would make perfect sense. It would make any one of them a significant player in the pay TVworld, which none currently is. Experience in the US has shown that media companies are most effective when they are in both free and pay television.
Buying Flextech would also be a logical deal for the likes of Discovery, which could combine all its UK channels with the Flextech channels and, if the BBC agreed, put them together in one company with the UKTV channels. That would give the new company, owned by Discovery but with the BBC holding a significant minority stake, real clout in the pay TV world.
Then we come to the private equity players. They are currently wandering aroundlooking for media companies to buy. While it's hard to see what they could do to give them the 20 to 25 per cent annual return they require,it wouldn't be impossible. The field is wide open and it will come down to who is prepared to pay the most. If the price is very high, no one should rule out the BBC selling its half of UKTV as well. Remember - you read it here first!
ITV's licence threat win
ITV Chief Executive Charles Allen and his regulatory team did a brilliant job persuading Ofcom to reduce the amount they have to pay for their ITV licences by more than £130 million a year - at least ten million a year more than they expected. But the question remains, why did the regulator go along with it?
Richard Hooper, the Deputy Chairman of Ofcom, was asked why the regulator was being so nice to ITV when he was interviewed by Ray Snoddy at an Institute of Economic Affairs conference a week before the announcement was made. While refusing to comment on the size of the reduction, he said that Ofcom had to take into account ITV's threat to hand back their licences if they didn't get more help. So now we know ITV's threats worked.
After the news was released, Allen made a couple of interesting comments in the press. First he was reported as saying that he was "minded" to accept the new price, whereas what he really meant to say was that he wanted to bite Ofcom's hand off. Then he said that the decision meant ITV would have more money to spend on drama, which will have come as a surprise in the City, where they'd upped the share price assuming the extra money was going to the bottom line.
In the course of time perhaps Nigel Pickard will tell us how much his programme budget is being increased as a result of the decision.