* New company will have 20 million customers
* Will pay in cash, debt, TV stake, share placing
* Risks seen in creation of "Sky Europe"
* BSkyB shares fall 5 pct (Adds names of banks that advised on the deal)
By Kate Holton and Leila Abboud
LONDON/PARIS, July 25 (Reuters) - Britain's BSkyB has agreed to pay $9 billion to buy the Rupert Murdoch's pay-TVcompanies in Germany and Italy, taking its hunt for growth intoEurope by creating a media powerhouse with 20 million customers.
Under the deal, BSkyB will pay Murdoch's 21st Century Fox for the pay-TV companies using cash, debt, its stake ina TV channel and a placing of shares that represents around 10percent of its issued share capital. Murdoch is also the largestshareholder of BSkyB.
The deal, which will make BSkyB the leading pay-TV providerin Europe, adds to a flurry of consolidation in the global mediasector as traditional entertainment companies seek to bulk up tocompete against more nimble Internet rivals.
Fox is expected to use the proceeds to fuel its pursuit ofTime Warner, which recently rejected a bid by Fox of $80 billion.
BSkyB had flagged a possible deal for Sky Deutschland (Other OTC: SKDTY - news) andSky Italia in May. The price announced on Friday was slightlylower than expected by some analysts and the cost and revenuebenefits higher.
But BSkyB's shares fell 5 percent, pulled lower by the planto issue stock and suspend a share buy-back.
"It is a bit of a step in the unknown for Sky," said ConorO'Shea, an analyst at Kepler Capital Markets. "For the firsttime, it will go from UK-focused to European and be asked toprove 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-yearhistory, BSkyB has decided its future growth lies in creating aEuropean pay-TV leader that will operate in Britain, Ireland (Other OTC: IRLD - news) ,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.Of 97 million households in the five countries it wants totarget, 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 inEurope," said Richard Hunter, head of equities at HargreavesLansdown.
Fox owns 100 percent of Sky Italia, 57 percent of SkyDeutschland and 39 percent of BSkyB. BSkyB will pay 2.45 billionpounds ($4.2 billion) for Sky Italia and 2.9 billion pounds forFox's 57 percent stake in Sky Deutschland.
Under German takeover law, BSkyB also has to make an offerfor the minority investors in Sky Deutschland, but with only asmall premium on the table, analysts doubt that many will sell.The overall price for the deal would rise to around 7 billionpounds if German investors did sell out.
For Sky Italia, the price will be made up of cash andBSkyB'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 itsstake in BSkyB stable, meaning it will take net proceeds fromthe deal of around $7.2 billion. The placing raised 1.4 billionpounds, according to traders.
In the eyes of many media executives and investors,programming and content are now seen as more valuable than theinfrastructure that carries it to people's homes.
That change has been driven in part by firms such as Netflix and Google (Xetra: A0B7FY - news) 's Youtube, which have taken awayviewers from traditional pay-TV services delivered by satelliteoperators or cable companies.
The shift has led some like Murdoch's Fox to concentratemore on content, but for those like BSkyB that remain in bothcontent and distribution, they need to invest heavily intechnology and fresh programming to see off the challenge.
DRIVE DOWN COSTS
BSkyB's deal is a bet that it can squeeze out costs oneverything from set-top boxes to broadcasting rights. It aims toreap 200 million pounds of annual cost savings by the end of thesecond financial year, with revenue synergies coming after that.
Analysts said the deal could make BSkyB an attractivetakeover target in the future for a group such as Vodafone which has been buying fixed-line assets in Europe tobolster its mobile offering.
Vodafone Chief Executive Vittorio Colao told reporters thedeal could make BSkyB more appealing in terms of the contentsharing agreements the two companies already have.
"It demonstrates that in a world which is increasinglydigital it is important to have scale and cross-countrypresence, which is exactly what Vodafone has," he said.
The increased scale, and the fact the group has not hikedits leverage too high, should also bolster BSkyB when it goes upagainst telecoms group BT in the next auction for EnglishPremier League rights - its most important offering for many ofits subscribers.
The deal is not without risks, however, and it could take awhile for the creation of a "Sky Europe" to pay off.
Sky Italia, Italy's biggest pay-TV operator, has lost220,000 customers since its peak in 2011 as the country'sprolonged economic downturn led more people to ditch theirmonthly TV packages.
Sky Deutschland is growing strongly in terms of customeradditions and revenue, helped by the appeal of its domestic andEuropean soccer matches, but the percentage of those willing topay for TV in Germany remains low - below 20 percent.
The company's credit rating is likely to be downgraded. Itsratio of debt to core earnings will also move to just below 3from the current level of 1. As a result, the group said itwould not resume share buybacks or do any further acquisitionsuntil its leverage target was achieved.
Chief Executive Jeremy Darroch said he did not envisage anyregulatory problems with the deal. Barclays (LSE: BARC.L - news) and Morgan Stanley (Xetra: 885836 - news) acted as advisers for BSkyB, while J.P. Morgan co (Other OTC: MGHL - news) -led thefinancing. Herbert Smith was BSkyB's legal adviser. DeutscheBank, Lazard Ltd, Goldman Sachs (NYSE: GS-PB - news) and law firm Allen & Overyadvised Fox.
($1 = 0.5888 British Pounds) (Additional reporting by Paul Sandle; Editing by Tom Pfeiffer,Tom Heneghan, Catherine Evans and Leslie Adler)
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