Bell Atlantic

"In 1990, the government had sold Telecom to two US telecom giants, Ameritech of Chicago and Bell Atlantic of Philadelphia, and to the New Zealand firms Freightways (owned by Gibbs and Farmer) and Fay, Richwhite (the investment bank owned by businessmen Michael Fay and David Richwhite) for $4.25 billion. Freightways and Fay, Richwhite had brokered the deal and Gibbs, who was on Telecom’s board, chaired the board committee that ran the company. Through this, Gibbs had come to know the Americans well and was used to dealing with them. He offered to talk to them about whether they might be interested in Sky. It turned out that they might."

"Gibbs and Heatley brought together representatives of the two biggest American media companies of the time, Time Warner of New York and Tele-Communications (TCI) of Denver, with two of the US’s biggest telecoms companies, Bell Atlantic and Ameritech, and began negotiating with them to buy into Sky. Initially, Gibbs and Heatley suggested they acquire 40 per cent of Sky, but the Americans were adamant it would be 51 per cent or nothing."

"Then a few days before the bid was due, Gibbs ‘had a brainwave’. He now offered to commit to buying 10 per cent of the shares at the purchase price. They’d put down $20 million on settlement day and the rest, $380 million assuming a bid of $4 billion, would be due three years later. The Americans would fund them for those three years, while the New Zealanders would pay them interest on the outstanding money until they paid for the shares. Gibbs recalls: *That got the Americans’ attention. ‘Oh that’s a different deal,’ they said, ‘you’re committed to buy.’ And there it was: the greatest coup of my business career, the chance to make serious money. We’d own the shares but didn’t have to pay for three years; we’d put down $20 million, but that would represent only part of our merchant banking fee; we’d have to pay interest, but dividends would probably cover that, and unless something went badly wrong, in three years’ time the shares would be worth a hell of a lot more than the original purchase price.* But what if something did go badly wrong and Telecom shares went down over the following three years; what if Gibbs and his friends had to stump up another $380 million in 1993 for shares that were worth only $200 million? Gibbs hadn’t been prepared to take that risk. Under the deal that he prepared, Freightways and Midavia would buy the shares through a company, Carla Nominees, which only had $100,000 capital and they would give no personal guarantees. Furthermore, Gibbs took the precaution of securing their $20 million down payment against the shares. Bell Atlantic and Ameritech, for all their lawyers and checkers, overlooked doing the same for their $380 million, so if for any reason the New Zealanders didn’t pay they’d get their $20 million back before the Americans received any of their $380 million. And they were risking only $100,000. Carla Nominees had entered a binding contract to purchase the shares, but the New Zealanders had no risk. It was effectively still an option."

"Gibbs’ primary contribution came in mid-1991, a year after Sky was launched. As Coopers & Lybrand had predicted, the fledgling business was taking longer to get established than initially estimated; the New Zealand economy was in deep recession and subscribers were signing on in a trickle rather than the steady flow that Heatley had confidently anticipated. The business was losing $1 million a week, which gained everyone’s attention. Heatley hadn’t lost confidence but admitted that he’d underestimated the startup costs. He remembers Gibbs calling him up at home one evening and saying, ‘Craig, you promised me that if I put a little bit of money in Sky I’d have lots of fun; I’ve now got more than a little bit of money in it, and it’s no fun at all.’ Their solution was to bring in more investors to contribute around $100 million in fresh capital. They started talking to Gibbs’ partners at Telecom, Bell Atlantic and Ameritech, sowing the idea that this could be a useful experiment for them. In the United States telecommunications companies were barred from investing in cable television, so New Zealand would provide an opportunity for them to explore potentially interesting synergies between the two industries. Soon a consortium was drawn together comprising Bell Atlantic, Ameritech and two cable companies, Time Warner and TCI, and they began negotiating an appropriate price for 50 per cent of Sky."

"Gibbs and Richwhite pared back the Telecom task to its essentials. Rob Cameron’s team carried out a very detailed and robust valuation exercise; Richwhite thought they’d have to pay at least $3 billion, a lot more than their resources. The primary object, then, was to find the hungriest potential buyers overseas, since they’d pay the most and thus were most likely to win the tender. Gibbs and Richwhite divided responsibilities; Richwhite dealt with Telefonica in Spain, BT and several American companies, while Gibbs concentrated on other Americans. As early as May 1989 Gibbs had met with Bell Atlantic. He quickly concluded that they and Ameritech, another US firm, were ‘the hottest to trot’."

"So Gibbs had left Telecom by May 1999. Ironically, soon afterwards Craig Heatley and the others on the Sky board went cold on their proposed acquisition of ihug, which had been the actual trigger for Gibbs’ departure from the Telecom board. Sky, meantime, had been an excellent investment for Gibbs and Farmer. The US grouping of Ameritech, Bell Atlantic, Time Warner and TCI, which Gibbs had helped to bring in as 50 per cent shareholders in 1991, had provided the company with the additional capital it needed to get established with two excellent executives in Nate Smith and John Fellet. But the American partnership was inherently unstable because of the rivalry between its constituent companies. In August 1997 Heatley engineered the sale of the Americans’ stake in Sky to Independent Newspapers Limited (INL), a New Zealand newspaper company that was controlled by Rupert Murdoch’s News Corporation.[15](private://read/01jrsfvkjy84rkprtbz9amfvj8/#rw-num-note-477355-616451090-15) Then a few months later, in November 1997, Sky had its initial public offering."