Satellite broadcaster BSkyB has agreed to buy Easynet for £211 million to expand into the country's fast-growing broadband internet market and take on its cable rivals.
BSkyB said yesterday it would pay 175 pence in cash for each loss-making Easynet share, a 38 per cent premium to their closing price of 127 pence on Thursday.
Easynet shares jumped 35.4 per cent to 172-1/2 pence and analysts said the deal terms, at nearly 1.1 times 2006 forecast sales, appeared pricey, although it made strong strategic sense.
The deal will allow BSkyB to offer "triple-play" broadband, television and telephony services to customers, putting it in head-to-head competition with merging cable companies NTL and, as well as BT Group.
The deal is the boldest strategic move so far by BSkyB's Chief Executive James Murdoch. Since he arrived two years ago, BSkyB has focused on adding new subscribers to reach its goal of 10 million by 2010 from nearly eight million now.
BSkyB has said it plans to move to a hybrid broadband and satellite distribution model. Broadband has an advantage over satellite in delivering customised content like video-on-demand.
The company said Easynet would give it an established presence in the broadband market and an attractive source of new revenues and new customers. Easynet mainly does business with corporations and also owns the fledgling UK Online consumer internet access business.
"This positions Sky very well to take a leading position in what we think is a very attractive and fast growing segment of the market," James Murdoch told reporters.
"We've reached a point where integration into a home entertainment platform will be both viable and attractive to customers and we expect to see rapid convergence between pay-TV penetration in the marketplace and broadband penetration."
BSkyB, 37 per cent owned by Rupert Murdoch's media conglomerate News Corp, said last week it planned to raise about one billion pounds with a bond placement, with some of the proceeds earmarked for acquisitions.
Some reports have also mentioned Video Networks, owner of the small Homechoice TV-over-broadband service, as a possible BSkyB acquisition target.
Asked if the company was looking for additional deals in the broadband marketplace, Mr Murdoch said BSkyB remained open to ways to accelerate its strategy.
"We definitely think that in a marketplace changing as rapidly as this, we want to keep all our options open," said Mr Murdoch, who is Rupert Murdoch's younger son.
BSkyB said it expected the deal to be only modestly dilutive to earnings in the short term, but did not say by how much.
Shares in the company were 0.10 per cent up at 519-1/2 pence, giving it a market value of around £9.57 billion.
"The strategic rationale for the acquisition is sound, and ownership of Easynet will allow BSkyB to compete more effectively," said analysts at Numis Securities.
The brokerage expects the acquisition to be around two per cent dilutive to next year's forecast earnings per share.
BSkyB said the Easynet deal would give it control over an advanced internet Protocol-based national telecoms network and access to about 18 per cent of homes. "(That)... is equal to the footprint of the Telewest network," said Mr Murdoch.
Easynet has been investing heavily in "local loop unbundling" by placing its own equipment in BT Group's local exchanges, a process that will enable it to sell telecoms and internet services directly to homes without depending on BT.
Mr Murdoch said Easynet had already unbundled 232 BT exchanges, and plans to take that to over 1,000, which would give it access to 75 per cent of homes.
BSkyB was advised by Lazard and Morgan Stanley, while ABN AMRO advised Easynet.