Thursday, November 03, 2005

What do you want to buy?

The financial press is filled with speculation on further M&A deals, with two names coming up repeatedly: Fastweb and HomeChoice. The stories coming out of Italy cite an interest in Fastweb from BT, which would certainly mark a dramatic change in strategy if it turned out to be true. Meanwhile, in the UK, Sky is being touted as a possible suitor for HomeChoice. I would like to argue that the pairings may be reversed.

As I suggested at the end of this post, my feeling is that NewsCorp’s Sky Italia is a much more obvious candidate for Fastweb, given the Sky/Easynet product roadmap, and the unholy alliance between DTT and DSL in the Italian football market. While Fastweb’s existing offering on fiber might prove a challenging integration prospect, the growth is in DSL, and Fastweb’s move to a focus on single-play (capturing as much of the DSL market as possible as quickly as possible) would fit with the rationale behind the Easynet deal.

As for HomeChoice, the company has a fantastic product, no doubt about it, but it unfortunately has found itself swimming against the tide of near-ubiquitous Sky marketing, the runaway success of Freeview, and resurgent cable players. Arguably, the company could do with a financially strong backer/owner to increase investment in brand creation in a difficult market. For Sky, however, it’s difficult to see the rationale for picking up HomeChoice. As I have pointed out previously, HomeChoice already markets subsets of Sky content, and the HomeChoice content offering is strong enough that I would expect there to be a fairly high cannibalization risk to Sky’s satellite business if it pushed the HomeChoice platform too hard. More fundamentally, there are issues around differences in EPG and user interface, etc., which I expect a seasoned player like Sky, accustomed to uniformity and control, would find unpalatable. Most fundamentally, looking at Sky’s technology roadmap and hearing James Murdoch state definitively that Sky would not look to replicate linear TV on DSL in the near future, I would argue that an acquisition of HomeChoice would be way off message.

One thing which hasn’t come up in the coverage I have seen is the fact that BT has been an investor in HomeChoice from early times, and should be well acquainted with the company and its potential. As far as I am aware, prior to the last funding round, BT held 7% of HomeChoice (structured as a warrant), though I am unclear as to whether this holding may have been diluted in the fund-raising. Finding itself arguably coming late to the TV party, perhaps there is a rationale for accelerating the process via acquisition. Then again, this would also go against BT’s stated product roadmap, but maybe desperate times call for greater flexibility.

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