Vodafone Group PLC plans to add pay TV to its New Zealand operations through a 3.44 billion New Zealand dollar (US$2.44 billion) merger of its local unit with Sky Network Television, as the world's big telecommunications companies continue to pivot toward TV and online video.

Sky said Thursday it will issue new shares to Vodafone at NZ$5.40 a share—a 21% premium to its last closing price before trading was halted Wednesday—and pay NZ$1.25 billion in cash, giving Vodafone a 51% stake in the combined entity. Russell Stanners, currently chief executive of Vodafone New Zealand Ltd., will head the new business.

The move follows a trend by telecommunications companies to do deals that will help them bundle media content into their offerings to differentiate themselves from competitors and reduce customer churn.

Last year, AT&T Inc. acquired U.S. satellite-television company DirecTV for US$49 billion, and Verizon Communications Inc. acquired AOL Inc., for US$4.4 billion, gaining technology that plays videos and serves up ads.

While U.K.-based Vodafone, the world's second-largest mobile carrier, behind China Mobile Ltd., once focused on selling only mobile-phone subscriptions, it has been investing heavily in recent years in adding fixed lines for cable television and broadband, enabling it to sell combo packages with both wireless and fixed line services.

Last year it announced plans to launch television services in the U.K. to boost revenues amid greater competition from incumbent players who had been strengthened by a round of industry consolidation.

For Sky, the deal with Vodafone comes as it struggles to battle competition from on-demand and streaming content providers such as Netflix Inc.

"It's a real survival strategy," said Morningstar analyst Brian Hann. "By going down this route they have basically admitted that as a stand-alone pay-TV single product company, we simply can't compete."

Sky is the leading pay TV operator in New Zealand with more than 830,000 subscribers serving almost half of all New Zealand households.

However, profits fell last financial year as it ramped up investment in content deals to try to compete with rivals, and the company surprised the market in May by forecasting subscribers will be down the second half of this fiscal year as many customers who had signed up for last year's Rugby World Cup decided not to renew their contracts.

Its efforts to move into new areas such as on-demand TV and over-mobile streaming have lagged behind competitors and been marred with technological glitches.

Basketball fans hoping to watch New Zealander Steven Adams and his Oklahoma City Thunder team take on National Basketball Association reigning champions the Golden State Warriors in San Francisco via the Sky Go app were disappointed last month. Live streaming on the app stopped working around tip-off and was down for the majority of the game -- one of the biggest of the year for New Zealand basketball fans.

Analysts said Vodafone can provide Sky with much-needed technology investment and expertise to ensure its content is available at all times, across multiple devices.

Vodafone is the biggest provider of mobile-phone services in New Zealand with more than 2.35 million connections and is the No. 2 fixed-line competitor with more than 500,000 broadband and home-phone connections. Already, it provides Sky TV packages to customers via a wholesale relationship between the two companies.

The combined group will be one of the largest companies listed on the NZX Main Board, and will have a revenue of NZ$2.914 billion in the year ending June 2017, Sky said.

Still, some analysts are questioning how long Vodafone will remain in the market.

"New Zealand is a very marginal, mature market for Vodafone to parent, so questions can always be asked" about what Vodafone is doing in New Zealand," said Morningstar's Mr. Hann. "That's now in a ready-made exit vehicle and later on down the track they can sell it more easily."

Sky shareholders will vote on the deal in a meeting scheduled for early July.

Write to Rebecca Thurlow at rebecca.thurlow@wsj.com and Kate Geenty at kate.geenty@wsj.com

 

(END) Dow Jones Newswires

June 09, 2016 01:35 ET (05:35 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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