Canal Plus to Buy NetHold in Deal Worth $1.6 Billion

Canal Plus, the French pay TV company, has agreed to acquire its Dutch-based rival NetHold for stock valued at about $1.6 billion in a move that would create one of the largest television groups in the world.

NetHold, which has pioneered the development of digital TV in Europe, Africa and the Middle East, was on the verge of signing an agreement with DirecTV, the U.S. pay TV company owned by General Motors Corp. through its Hughes Electronics unit, when Canal Plus made its unexpected proposal. Talks between the two companies began only a week ago.

The new deal would create a company with 8.5 million pay TV subscribers and an audience stretching across Europe. Industry analysts said the companies’ holdings complement each other and that the size of the subscriber base could help drive down the cost of digital decoders--a primary obstacle to the growth of pay television.

Pierre Lescure, chairman and chief executive of Canal Plus, said at a news conference, “I cannot think of a better strategic fit for Canal Plus.”

The acquisition plans are the latest in a series of such alliances forged--and sometimes undone--between European companies jockeying for position in what is an exploding market for digital pay TV services. Another formidable competitor is the joint venture involving British Sky Broadcasting (40% owned by Rupert Murdoch’s News Corp.) with the Kirch Group of Germany.

NetHold Chief Executive Koos Bekker said: “The new company will combine established territories which are spinning off cash and growing areas which are absorbing cash at the moment. It will also expedite the launch of digital TV across Europe.”

Should the partnership expand, as planned, into new European territories, it would be likely to drive up the cost of rights to Hollywood movies, which have been fetching record prices in pay TV markets.

A partnership with DirecTV would have created a global business to rival Murdoch’s empire. DirecTV’s presence in Latin America and its plans to launch in Japan next year would have complemented NetHold’s positions in Europe, the Middle East and Africa. The two companies entered the digital race in its early days; DirecTV has signed up more than 1.4 million subscribers since its launch in 1994.

But NetHold decided to concentrate on trying to corner the European market instead. It hopes the combination of Canal Plus’ strong cash flow from established markets, particularly in France, and the geographical coverage the two groups can provide would give it extra clout when it comes to buying programming.

“What we want to create is a franchise in Europe,” said Johann Rupert, chairman of NetHold and chief executive of NetHold joint owner Richemont of Switzerland.

Under the agreement announced by the companies, Canal Plus would buy NetHold from its joint owners, MIH, the South African pay TV company, and Richemont, the Swiss-based investment arm of South Africa’s wealthy Rupert family, for 6.1 million new Canal Plus shares and $45 million in cash. The share issue would leave Richemont with 15% and MIH with 5% of Canal Plus.

Before the sale, NetHold would transfer its operations in Africa, the Middle East, Greece and Cyprus to MIH, which would cooperate with the new company.

Richemont, whose main business is luxury goods with names such as Cartier and Dunhill, originally became interested in pay TV as a long-term investment in a growth area, to counterbalance its aging brands and the mature cigarette market.

Canal Plus’ largest shareholders are the media company Havas and Compagnie Generale des Eaux, an acquisitive water company that has interests in cable TV.

The company, with 7 million subscribers to its pay TV services, dominates its home market in France, where it has relied on sports and movies to drive its expansion. It aims to have 150,000 to 200,00 subscribers to its new 20-channel package, Canalsatellite Numerique, by the end of the year, and hopes to have taken 65% of the French market within a decade. Lescure has publicly committed the company to investing about $100 million in digital TV over the next three years.

Canal Plus has expanded beyond its home market by taking, together with local companies, minority stakes in Belgian, Spanish and Polish pay TV. NetHold, by comparison, has concentrated on expanding into countries where pay TV is in its infancy such as the Netherlands, Belgium, Luxembourg and the Scandinavian countries.

One of the biggest attractions of NetHold for Canal Plus is its involvement in Italy, which analysts believe has great potential for pay TV. NetHold’s 45% of Telepiu, a locally based pay TV service, would give Canal Plus instant access to the market. Telepiu’s other shareholders are the Munich, Germany-based Kirch Group, which owns 45%, and Fininvest, the holding company of former Italian Prime Minister Silvio Berlusconi, which owns the remaining shares.

Bloomberg Business News contributed to this report.