By Kate Holton and Leila Abboud LONDON/PARIS (Reuters) - Britain's BSkyB (L:BSY) has agreed to pay $9 billion to buy Rupert Murdoch's pay-TV companies in Germany and Italy, taking its hunt for growth into Europe by creating a media powerhouse with 20 million customers.
BSkyB, in which Murdoch's 21st Century Fox (O:FOXA) is also the largest shareholder, will pay for the deal using cash, debt, its stake in a TV channel and a placing of shares that represents around 10 percent of its issued share capital.
The deal adds to a flurry of consolidation in the global media sector and Fox is expected to use the proceeds to fuel its pursuit of Time Warner (N:TWX), which recently rejected Fox's initial $80 billion bid.
BSkyB had flagged a possible deal for Sky Deutschland and Sky Italia in May. The price announced on Friday was slightly lower than expected by some analysts and the cost and revenue benefits laid out by BSkyB were greater than anticipated.
BSkyB's shares still fell 3.4 percent, pulled lower by the plan to issue stock and suspend a share buy-back.
"It is a bit of a step in the unknown for Sky," said Conor O'Shea, an analyst at Kepler Capital Markets. "For the first time, it will go from UK-focused to European and be asked to prove that it can add value from being larger."
O'Shea has a "buy" rating on BSkyB shares.
Facing the toughest market conditions in its 25-year history, BSkyB has decided its future growth lies in creating a European pay-TV leader that will operate in Britain, Ireland, Germany, Austria and Italy.
BSkyB dominates British pay-TV, offering its premium sports, movies and U.S. drama programming to more than 10 million homes. It hopes to apply the formula in Italy and Germany, where pay-TV is not yet as popular or as profitable.
Of 97 million households in its markets, 66 million are yet to take pay-TV.
"Sky is clearly taking the strategic view that Pay TV, already ingrained in the U.S. culture, will become prevalent in Europe," said Richard Hunter, Head of Equities at Hargreaves Lansdown.
Fox owns 100 percent of Sky Italia, 57 percent of Sky Deutschland and 39 percent of BSkyB. BSkyB said it would pay 2.45 billion pounds ($4.2 billion) for Sky Italia and 2.9 billion pounds for Fox's 57 percent stake in Sky Deutschland.
The payment to Fox for Sky Italia will be made up of cash and BSkyB's 21 percent stake in the National Geographic Channel, valued at around 382 million pounds.
Fox said it would subscribe to the share issue to keep its stake in BSkyB stable, meaning it will take net proceeds from the deal of around $7.2 billion.
BIG ASPIRATIONS
BSkyB is betting it can squeeze out costs on everything from set-top boxes to broadcasting rights via the expansion. It aimed to reap 200 million pounds of annual cost savings by the end of the second financial year after the deal is completed and pledged further savings later.
The deal is not without risks, however, and it could take a while for the creation of a "Sky Europe" to pay off.
Sky Italia, Italy's biggest pay-TV operator, has lost 220,000 customers since its peak in 2011 as the country's prolonged economic downturn led more people to ditch their monthly TV packages.
In Germany, Sky Deutschland is growing strongly in terms of customer additions and revenue, helped by the appeal of its domestic and European soccer matches, but the percentage of those willing to pay for TV in Germany remains low - below 20 percent.
And in Britain, BSkyB is facing tough competition from telecoms group BT (L:BT), which is spending heavily to buy rights and lure customers.
The deal also requires sacrifices of BSkyB and its shareholders.
The company's credit rating is likely to be downgraded. It pledged to bring its debt ratio back down "in the medium-term" to two times earnings before interest, tax, depreciation, and amortization (EBITDA). As a result, the group said it would not resume share buybacks or do any further acquisitions until its leverage target was achieved.
Under German takeover law, BSkyB will have to make an offer for the rest of Sky Deutschland. The offer will be at 6.75 euros per share, compared to the 6.66 euros Sky Deutschland closed at on Thursday.
CFO Andrew Griffith told reporters the group's net debt to core earnings would be below 3 times if the German minorities do not take up the offer, and that it would be around 4 times if the German minorities did take up the offer.
Analysts said that given the limited premium, they expected few Sky Deutschland shareholders to tender their stock.
(Reporting by Kate Holton; editing by Paul Sandle and Tom Pfeiffer)