Rupert Murdoch's News Corp is proposing to pay $12 billion to take full control of British satellite broadcaster BSkyB as it seeks to generate steadier earnings and make better use of its cash pile.
But BSkyB, founded more than 20 years ago by Murdoch and still chaired by his son James, demanded a higher offer on Tuesday for the 61 percent of BSkyB that News Corp does not already own.
News Corp proposed to pay 700 pence per share for BSkyB, which dominates Britain's pay-TV market thanks mainly to top sports offerings -- representing a 17 percent premium to Monday's closing price.
BSkyB's independent directors unanimously rejected the bid as too low. They said they would be prepared to support an offer of above 800 pence per share.
Shares in BSkyB leapt as much as 22 percent, their biggest single-day jump for a decade, and were later up 17.15 percent at 703.5 pence on expectations a deal is likely. News Corp shares were up 7.24 percent at $14.07 on the Nasdaq at midday.
At 700 pence, News Corp -- which has $8.2 billion in cash and equivalents -- would be paying $11.6 billion for the 61 percent of BSkyB it does not already own.
News Corp President Chase Carey and Chief Financial Officer David DeVoe told analysts on a conference call that the company is focused on funding a deal with cash and debt. If News Corp and BSkyB are unable to reach a satisfactory agreement, News Corp executives indicated they had other options, but declined to say if that could include a future offer involving equity.
Until a potential deal is approved by regulators, however, neither side plans to negotiate further on price, according to sources close to the talks. Approval could take up to a year.
Last month, Murdoch told investors during an earnings call that the company's balance sheet was inefficient and he was looking at uses for its cash, including dividends, buybacks and debt repayments as well as investments in the business. News Corp executives said on Tuesday that a stock buyback would be unlikely before the BSkyB deal is settled.
David Joyce, an analyst with Miller Tabak & Co, said investors had reacted warmly to the potential deal because it would give News Corp more recurring monthly revenue through subscriptions, reducing its exposure to advertising.
Investors have really tended to like the media companies that have much more visibility, he said.
Indeed, James Murdoch, who runs News Corp's European and Asian operations, has made clear that pay-TV in Western Europe is a top priority.
News Corp -- which includes the Fox television network, movie company 20th Century Fox and the Wall Street Journal -- also owns 45 percent of German pay-TV broadcaster Sky Deutschland , whose shares rose 9.6 percent.
BSkyB's premium sports offerings include Premier League soccer, the Ashes Test cricket series and the Tri Nations rugby championship. It will become the first TV company in Britain to broadcast in 3D later this year, after pioneering HDTV.
The recent slide of Britain's pound sterling, combined with the ending of significant investments by BSkyB in broadband and high-definition technology, make this an opportune time for News Corp to make its move, analysts argue.
London brokerage Numis said it expected a deal at between 700 and 800 pence, and raised its target price to 800 pence.
News Corp is in robust financial health while the BSkyB valuation does not fully reflect its medium-term growth potential. Combined with the current weakness of sterling, we can certainly see the attractions of a bid, its analysts wrote.
News Corp said outright ownership would make the value of its decades-old investment more transparent to its shareholders and increase its geographical diversification.
The company said its offer valued BSkyB at 11.8 times 2010 earnings before interest, tax, depreciation and amortization (EBITDA) -- significantly more than the average multiple of seven for European pay-TV firms and six for U.S. counterparts.
Ratings agency Standard & Poor's said the proposed deal would not change its BBB+ rating and stable outlook for News Corp.
News Corp's ownership of The Times of London, Sunday Times, and The Sun could present regulatory obstacles to buying all of BSkyB, despite a new right-leaning UK government that is expected to be more sympathetic to BSkyB. News Corp executives said on the call they did not think the potential deal would necessitate the sale of its other U.K. media properties.
BSkyB said it would work with News Corp to seek clearances from the relevant authorities.
News Corp and BSkyB left the door open for friendly talks that could run until February 2012, and said any deal would have to be approved by shareholders of 70 percent of BSkyB's stock.
Under the terms of the negotiations, News Corp agreed not to trigger a hostile approach by buying additional shares in BSkyB until two months after a deal receives regulatory clearance or after the end of 2011.
Should it want to break the terms, it would have to pay a fee of 38.5 million pounds.
BSKyB is being advised by Morgan Stanley and UBS. News Corp is being advised by Deutsche Bank and J.P. Morgan Cazenove.
(Additional reporting by Jennifer Saba in New York. Editing by Paul Hoskins, Louise Heavens and Matthew Lewis)