Market Insight

Arqiva up for sale

October 09, 2013

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Macquarie European Infrastructure Funds (MEIF), managed by Australian finance group Macquarie Infrastructure and Real Assets (MIRA), is to put its 25 per cent stake in UK managed service provider Arqiva up for sale. UK Canadian pension funds including PSP Investments and Canada Pension Plan Investment Board (CPPIB) are thought to lead the race for the considered £600m ($965m) transaction. CPPIB currently holds a 48 per cent stake in the company. Arqiva's revenue in the last years has been stable at between £820-830m ($1.32bn).

Providing much of the infrastructure behind television, radio, satellite and wireless communications in the UK, Arqiva led the switch over from analogue to digital in 2012. It connects major broadcasters like BBC, ITV and BskyB to their customers, and also provides the connectivity for leading UK mobile network operators and many emergency services operators.

Within the media industry its core positioning has been around terrestrial and radio infrastructure, multiplex management, satellite teleport and uplink, high-capacity video-over-fibre and managed services such as playout.

While Arqiva has increased its revenue over the past 5 years, last three years were flat and predictable, reaching in each case almost the same £820-830m ($1.32bn) level. Arqiva has reached a level when its revenues inside the UK (already over 87 per cent) will not increase with significantly with the current services, whereas its international incomes are not only comparatively insignificant but are also slightly declining. Revitalising growth and preventing competitors from taking market share as the industry demand changes is likely to be a key factor in Macquarie's decision to offload its stake in the company. The cost of building new capabilities and facilities to offset a stagnant or declining traditional broadcast managed services industry is key to Arqiva's future positioning. This has already resulted in a recent injection of £867m ($1.4bn) - £400m ($640m) in cash and the rest in withheld dividends - from its owners CPPIB and Macquarie's European Infrastructure Fund 2 earlier in 2013 as part of a £3.7bn ($6bn) loan and bond refinancing plan. The prospect of further costs to help reposition Arqiva in a rapidly evolving market along with MEIF extraction from video and broadcast assets are both likely rationale for the proposed sale.

While Arqiva was one of the first media managed service companies to offer advanced functions such as asset management , file-based workflows and remote playout, most was done to ease costs on its playout and uplink business rather than to service a wholly independent need. However, the past few years has seen a rapid interest in media managed services from major investors looking to capitalize on IP video storage, processing and distribution is threatening Arqiva's competitive position.

A few major deals have seen investment coming into competitive firms and facilities close to Arqiva's core markets. In 2011 Ascent Media's playout content distribution division was bought by US service provider Encompass for £55m ($88m) in a deal including the major London facility at 1 Stephen Street and purpose-built playout facility in Chiswick Park. During 2012 Ericsson acquired Technicolor's broadcast services division for almost £18m ($25m) bringing approximately 900 professionals and playout operations located in France, UK and the Netherlands serving several leading broadcasters. This has been followed by the acquisition of Red Bee Media and Microsoft's Mediaroom division, demonstrating Ericsson play not only in broadcast managed services, but in cloud services for pay TV. The Red Bee deal still needs be approved by the Competition Commission and until then belongs to Macquaire Private Equity Group, another investment fund belonging to MIRA.

Arqiva also faces more general competitive threats from a range of pre-existing and new entrants hoping to capitalize on the evolving needs of video storage, processing and delivery. The traditional industry, led by service providers such as Chellomedia, Globecast and TDF and transport providers such as Eutelsat, Intelsat and SES, has started to develop workflow, asset management and IP video services. New IP video specialists such as Brightcove, Ooyala and thePlatform have entered the industry as online video providers and increasingly as asset management, transcoding and storage services. International telcos and CDNs, such as Colt and Tata, Akamai and Level3, have likewise sought to capitalize on their core assets in IP delivery by providing video-specific services.

In the past, Macquaire through its funds was involved in several other infrastructure providers in the UK such as National Grid, the cable arm of NTL (other part was incorporated in Virgin Media), which established the foundation for Arqiva and Red Bee Media (soon Ericsson, subject to approvals). If offloading both stakes in Red Bee Media and Arqiva completes, MIRA's communication portfolio in the UK will be left only with Airwave - a provider of voice and data communication to the public services.

It seems unlikely that Arqiva will end up as an acquisition target in part of an industry consolidation due to the lack of possible buyers, implying that any future owner will need to invest in the company to help it retain positioning as the media managed services landscape shifts toward storage, processing and IP delivery over the next 5 years.

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