Sky Expands Partnership With HBO to Counter Netflix on Drama

(Bloomberg) -- Sky Plc and HBO are widening a co-production partnership with a $250-million spending commitment on dramas to counter entertainment heavyweights including Netflix Inc. and Inc.

Sky, the European pay-TV company being acquired by Rupert Murdoch’s 21st Century Fox Inc., will seek to produce two high-end dramas a year with Time Warner Inc.’s HBO, in the deal announced Thursday. The companies will aim to get the first production onscreen in 2018. Sky has existing rights to show HBO programs on its Sky Atlantic channel until 2020.

“Always the search is to get the very best productions,” Sky Chief Executive Officer Jeremy Darroch said on a call with reporters. “It’s all part of the mix and part of an ecosystem where we’re trying to work with the very best producers and distributors around the world.”

The deal builds on the three-way collaboration with France’s Canal Plus that created “The Young Pope,” a drama about the first American pope in history. Sky is broadening its reach and diversifying from its core sports TV offering by boosting spending on entertainment. It’s increasingly buying stakes in production companies and investing in its own studio business.

Sky was little changed at 983.5 pence as of 8:52 a.m. in London. The shares have been rising this month as investors wager the acquisition by 21st Century Fox is more likely to go through. The stock remains at an 8.6 percent discount to Sky’s offer of 1,075 pence a share.

O’Reilly Factor

Investors are focused on Sky’s takeover by Fox, the company’s largest shareholder with a 39 percent stake, which in December offered 11.2 billion pounds for the rest. The departure of TV host Bill O’Reilly, the star of the biggest draw for Fox News, helps mute one distraction for 21st Century Fox as it seeks to win U.K. regulatory approval for the acquisition.

While Fox is battling a controversy over sexual harassment allegations made against O’Reilly in the U.S., it’s awaiting a report from U.K. communications watchdog Ofcom due next month on whether its takeover of Sky raises public-interest concerns and whether Sky would continue to be a “fit and proper’’ holder of a broadcast license following the purchase.

Ofcom declared Sky a “fit and proper” holder in 2012, but expressed reservations about corporate governance failures by James Murdoch while he was executive chairman of News Corp.’s News International unit, during a phone-hacking crisis at the company’s newspapers. Murdoch had stepped down as chairman of Sky in 2012, becoming a non-executive director in the wake of the scandal, and returned as chairman in 2016.

On the call, Darroch declined to comment on the O’Reilly controversy.

U.K. Headwinds

Sky and HBO announced the partnership as the U.K. broadcaster released nine-month financial results. Revenue rose 5 percent from the prior year on a constant-currency basis to 9.64 billion pounds ($12.3 billion), even amid weakness in the U.K. advertising market. Operating profit fell 11 percent to 1 billion pounds as costs for showing English Premier League soccer rose, London-based Sky said in a statement.

The U.K. advertising market was down about 8 percent in the first quarter of the 2017 calendar year, Sky estimated, and said its advertising revenues in the country are down 3 percent year to date. U.K. retail sales have been anemic, consumer confidence remains negative and house price inflation has weakened, Darroch said.

“I’d just characterize it as more of a headwind,” he said. “That just puts a little bit more pressure on the business. I don’t think it prevents us getting to any of our goals.”