Satellite broadcaster BSkyB has offered to buy Amstrad Plc, the set-top box company headed by Sir Alan Sugar. The cash offer values Amstrad at around £125 million. Bringing design and development skills in house will help to accelerate innovation, reduce costs, and put pressure on other suppliers, such as Pace.

The directors of Amstrad have recommended acceptance of the offer, which represents a premium of nearly 25% on the recent share price.

Famously founded in 1968 as an electrical goods trader, Amstrad became well known as a supplier of low cost personal computers. The company launched the mass market satellite dish and receiver package for Sky TV in 1989. It then supported Sky with set-top boxes for the roll out of its digital television platform.

“Amstrad has worked closely with Sky for many years and I cannot imagine a better home for the Amstrad business and its talented people,” said Sir Alan Sugar, the chairman and chief executive of Amstrad. He is also best known to many British viewers as the man to please on the BBC version of The Apprentice television programme. The name Amstrad is a contraction of Alan Michael Sugar Trading.

“Our companies share the entrepreneurial spirit of bringing innovation to the largest number of customers,” he said. “Sky is a great British success story. I’m proud to have worked so closely with it, and I look forward to continuing to play a part in this exciting business.”

As a major supplier to the Sky Group, Amstrad currently designs and develops set-top boxes to their specification and then contracts out the production to specialists in electronics manufacturing services.

Amstrad supplied approximately 30 per cent of the set-top boxes purchased by the Sky Group over the last year. Sky says it accounted for approximately 75 per cent of the revenues of Amstrad. The company also supplies set to boxes to Sky Italia.

Despite enjoying good working relationships with both of these companies, the Amstrad directors recognised the vulnerability of the reliance on just two customers.

Amstrad saw that it would be a logical business step for Sky to take full in-house control of its future hardware and software development and manufacturing. In this case the long-term future of Amstrad could be under threat from the potential loss of its largest customer, which would be difficult to replace.

The acquisition of Amstrad will provide Sky with an in-house design and development capability, which Sky believes will deliver significant operational and financial benefits. It will enable the Sky Group to source some of its products directly from specialist electronics manufacturers. It will help them to accelerate product development and give them greater control over product design and technical specification. Perhaps more importantly it will result in lower overall costs to Sky. The company says it expects to see the benefit of these over the next financial year.

“Sky and Amstrad have had a long and positive relationship,” said James Murdoch, the chief executive of Sky. “The acquisition accelerates supply chain improvement and will help us to drive innovation and efficiency for the benefit of our customers.”

Bringing the Amstrad business in-house will put pressure on other suppliers, such as Pace and Panasonic, who also provide set-top boxes for Sky. At the very least it will enable Sky to drive a hard bargain, based on an intimate knowledge of the component costs.

Pace, another British provider of set-top boxes, recently announced annual revenues of more than £386 million, double those of the previous year. This produced a pre-tax profit of £6.1 million, compared to a loss of £15.6 million the year before. Volume shipments of set-top boxes were up to 3.9 million, compared to just 2.2 million a year ago. Over half of their revenues now come from the North American market, notably to DIRECTV and Comcast.

News Corporation, which is the majority shareholder in BSkyB, also has a technology subsidiary in the shape of NDS, which provides conditional access systems and set-top box middleware.

The acquisition of Amstrad further extends the vertical integration of BSkyB and offers possible benefits to other pay-television platforms in which News Corporation has an interest.

The DiSH Network, the main competitor to DIRECTV in the United States, grew out of the business of EchoStar, which also supplies set-top boxes of its own design.

Amstrad and Sky are apparently working on a new generation of Sky+ box that will allow viewers to record and play back two different programmes simultaneously on two separate displays. The multiroom Sky+ box is due to launch next year.