When the stardust finally settled: Rupert Murdoch's coup in snatching Hong Kong's satellite TV station from

THE TOWN of Ajaccio in Corsica is rarely at the centre of the world of big business. But on the evening of Thursday 22 July, its airport - which is mainly used for holiday charter flights - welcomed a corporate jet bearing the son of one of the richest men in Asia and a team of financiers from Goldman Sachs.

Richard Li, the 26-year-old son of Li Ka-shing, the head of the Hutchison Whampoa empire, and John Thornton, head of European corporate finance at Goldman Sachs, had just flown in from London. There they had met with the Second Viscount Blakenham and Frank Barlow, respectively chairman and managing director of the Pearson conglomerate.

The Pearson team had left the meeting with the impression that its offer to pay dollars 625m ( pounds 420m) for a 70 per cent stake in Star TV, Richard Li's Hong Kong-based pan-Asian satellite TV group, would be accepted.

The flight to Corsica changed that.

Accommodation in Ajaccio is scarce in summer. The junior tycoon and his high-powered advisers booked into a flea-pit hotel. Early on Friday morning, they flew to a port some 70 miles away and took a launch out to Morning Glory, the yacht owned by Rupert Murdoch, where the head of News Corporation was holidaying. In a scene that would not have looked out of place in one of Star's action-packed popular soaps, The Bold & The Beautiful, Mr Li agreed to sell Murdoch a 63.6 per cent stake in Star for just dollars 525m.

Mr Li immediately took the private jet to Hong Kong to ensure that the Hong Kong and Chinese governments would not block the deal. The Goldman Sachs team was left behind to dot the 'i's, cross the 't's and return home under their own steam. The two liaised over the weekend and by Monday morning the deal was sealed. Mr Li then phoned Pearson, which had by then realised it had not clinched the deal and was changing a presentation it was to make to the City the next day about its plans to demerge its oil and china interests.

For Pearson, which was generally assumed to be close to winning the battle for Star, it was an embarrassment and a setback to its plans to transform itself into a pure media group. In the words of someone close to the transaction: 'Pearson could have had the deal, but they lost it.' But did it really lose out? And if so, why?

Since the end of 1991, when its five 24-hour 'free-to-air' channels were all up and running, Star TV's success has confounded those who said it would find neither viewers nor advertisers. Validated figures released in February showed that 11.36 million households (45 million people) in 38 countries were able to receive the programmes - three times the number eight months earlier - and it boasted a footprint from Turkey to Japan, and from Mongolia to Indonesia. But the need to increase the number of channels, and its requirement for huge amounts of programming material, always meant that at some stage it would be looking for new investors.

The Li family's preferred partner was always Mr Murdoch. They admired what he had managed to achieve with Britsh Sky Broadcasting, and Julian Mounter, the Englishman who was brought in to head Star TV in February, was both a friend and an admirer of Sam Chisholm, the blunt New Zealander who runs BSkyB.

Twice this year, Richard Li and his father had reached broad agreement to sell a majority stake to News Corporation - and twice the deals fell down on the detail.

The Li family then approached Goldman Sachs to float Star TV. However, it became clear that Li Ka-shing thought being associated with an uncensored satellite TV service beamed into mainland China might damage his famous political influence in China and jeopardise the dollars 5bn he has invested there. While the company's success in China and Hong Kong was largely due to Li Ka- shing's contacts and business clout, it was also felt that Star TV would benefit from a relationship with a provider of programming - preferably a large media player that would facilitate future deals.

The Li family decided to have one last go at finding a partner to take the majority stake in Star TV. The earlier global trawl had thrown up about nine significant groups that had expressed interest, and this soon began to focus down to the most serious contenders. Goldman's Mr Thornton was mandated to approach both Pearson and News Corp with a deal in which they would take a majority stake in Star TV shortly ahead of a flotation.

Though both showed interest initially, Mr Murdoch was soon sidetracked. Last month, he appeared to have secured an agreement to take a minority stake in Television Broadcasting (TVB), a domestic TV station in Hong Kong involved in setting up a rival to Star TV. But the deal was thwarted by the colony's regulators and has now been abandoned (although Mr Murdoch has left the door open to strike some sort of deal with TVB, perhaps on the supply of programmes in Mandarin). Three weeks ago, it appeared News Corp was out of the running, but Mr Murdoch sprang into action, hauling Mr Chisholm back from his holiday in Australia to seal the deal.

Pearson still appeared to be favourite 10 days ago. But when it came to putting the final bids on the table, Pearson told Richard Li that it wanted a shareholders' agreement that would bind the Li family into retaining a substantial shareholding until 1998. Mr Li decided that this restriction on his stake made the deal less attractive than that offered by News Corp, even though Pearson was offering much more money.

So why did Pearson insist on the condition when it jeopardised a deal the company had been chasing for months? Mr Barlow maintains that Star TV, which is still losing money, is a risky investment and depends greatly for its success on the attitude of the Chinese government - not only is China the largest market for Star TV, but Hong Kong will revert to Chinese control in 1997. The Chinese government also owns one of the satellites that beams Star TV to earth. While he would not question the Li family's motives for wanting to sell out, Mr Barlow said Pearson would not have wanted to take the risk on Star TV if Li Ka-shing was about to pull out.

The risks to Star TV would also have been heightened if Mr Murdoch had lost - he had threatened to compete with Star TV.

Recently, when he made his attempt to buy into TVB to set up a rival Asian satellite service, it had just formed a consortium including Home Box Office Asia, Turner International, Australian Broadcasting and the ESPN sports network. One of TVB's greatest attractions was its huge library of Mandarin language programming, an invaluable asset for anyone aiming at China's fast-expanding television market.

For Mr Murdoch, the deal is a turning point in many ways. For a start, it is the first significant financial transaction that News Corp has completed since it nearly collapsed under the weight of its own debts in late 1990. It is also the first time Mr Murdoch has agreed to give a vendor a large number of his company's shares - Li Ka- shing will receive up to 2.7 per cent of News Corp, making him the third largest shareholder after the Murdoch family and Citicorp, the US bank.

In addition, Mr Murdoch is funding half the deal by issuing convertible preference shares - and it is expected that they will cede another 2.5 per cent of News Corp's capital to holders if they choose to convert. This will bring the Murdoch family holding in the News Corp empire, which once stood at more than 50 per cent, down to just 32 per cent.

In using Mr Chisholm to seal the deal, Mr Murdoch was sticking two fingers up at Pearson, which owns 16 per cent of BSkyB. He knew Mr Barlow, BSkyB's chairman, was negotiating for Pearson, so it was hardly diplomatic to use Mr Chisholm, the chief executive, as the News Corp negotiator. 'It can hardly do anything for their relationship,' said a merchant banker close to BSkyB. 'Not that there was a relationship in the first place.'

While Mr Chisholm works for BSkyB, he is actually employed by News Corp. His employment is covered by a shareholder agreement, which has no provision for Mr Chisholm working for News Corp at the same time. An agreement has been floated, but never settled, and close observers say Pearson is unlikely to instigate a row with News Corp over the matter.

Where does Star TV go from here? Its existing five channels Prime Sports, MTV, the Mandarin channel, BBC World Service TV, and the Star Plus entertainment channel will continue to be free to those with the dish to pick up the signals. The News Corp deal brings programming that will enable Star TV to improve the offerings on these channels, helping it to compete more strongly in countries with good domestic TV. Then, from October this year, it will expand into pay channels. News Corp, through BSkyB, will bring its expertise in operating a scrambled subscription service, as well as much-needed programmes. In programming terms, Mr Murdoch can offer Star TV the library of 20th Century Fox, and Fox broadcasting. In addition, Star TV is keen to plug into BSkyB's resources on sports programming there being a large appetite for European sporting events including football, athletics and cycling and arm Star TV's news services with feeds from BSkyB's expensive news operation in west London.

Plans are also under way to expand the 'footprint' and improve the strength of the signal. At the moment, Star TV is transmitted by AsiaSat 1, but the company has already reserved space on AsiaSat 2, which will be put in orbit in early 1995, and is also rumoured to be discussing space on the Apstar 2 satellite.

Increasing the number of channels means that Star TV can offer different language tracks as well as new channels. 'We will build a business out of Asia as big as two BSkyBs,' Mr Murdoch said after the deal was announced.

The biggest prizes are India and China. For the latter, where television ownership has become commonplace during 10 years of economic reform, Star TV still looks short of Mandarin language programming despite recent moves to stock up on products. This could mean that there is still room for News Corp to do some sort of deal with TVB, whose consortium plans are still at an early stage. Peter Smith, News Corp's director for technology, said last week that the two deals were not exclusive. The original TVB proposal has now been formally dropped, but no one at the moment is ruling out some future association.

The News Corp deal has been structured to avoid regulatory problems. The 63.6per cent stake is in HutchVision, the parent company of Star TV, which is the exclusive programme supplier and advertising seller for the Star TV network. The Li family and Hutchison Whampoa together will retain the remaining 36.4per cent. Most important, they retain control of HutchVision Hong Kong, which is the company licensed by the Hong Kong government to operate the satellite service. Under Hong Kong's telecommunications ordinance, the satellite licensee can be no more than 49 per cent owned by non-residents, but News Corp will not breach this rule. Nor, by comparison with the aborted TVB deal, has there been much grumbling in the colony about Mr Murdoch getting in on the act.

For Richard Li, the deal has left him everything to be pleased about. Star TV had been something of a test for him, set by his father. Dogged by a reputation that he was difficult to work with, Li junior has now proved that, surrounded by industry sceptics, he can establish a company and then sell a controlling stake at a handsome profit.

Pearson has added to its reputation of a company that cannot complete deals, having failed to tie the knot with Elsevier and not proceeding with its interest in Mirror Group Newspapers.

So far, City and Wall Street reaction to Mr Murdoch's return to the acquisition trail has been almost universally favourable.

Mr Murdoch's empire is still stretched financially, but this deal - unlike some of those he launched in the late 1980s - seems to be of a manageable size.

It also puts him in poll position in the world's largest potential TV market. There's plenty of scope for things to go wrong, but if they go right, the rewards could be beyond the dreams of avarice.

(Photograph omitted)