Sky Deutschland: “Substantial upside”

The past 10 days have been busy for Munich-based Sky Deutschland. They have restructured their debt, issued extra shares to backer News Corp, declared record subscriber numbers and organised fresh working capital. All in all, says Sarah Simon, an analyst at Berenberg Bank, “Sky Deutschland continues to be the best structural growth story within our coverage universe, and we see substantial medium to long-term upside as that growth is realised.”

The News Corp involvement, at least as far as the financial restructuring is concerned, is key. As Simon explains: “Rather than raising €144 million as had been expected, the company will raise €438 million in equity, of which €348 million will come from News Corporation via a private placement at €4.46/share, and the balance from a rights issue at likely around the same price. News Corporation’s stake rises from 49.9 per cent to 54.5 per cent, and it will take up its pro-rata rights in the rights issue, with the ability to acquire additional shares should the rights not be taken up by other shareholders.”

“Thus Sky Deutschland gains a significant extension in its funding profile and flexibility from the lack of covenants,” says the bank’s report, “and reduces its overall leverage, while also gaining access to additional funding (equity). In our view this financing round should pull the rug from under the feet of the “why should it buy this now when I will be able to buy it cheaper in a rights issue” bears.”

“The cost of doing this will not be cheap,” she warns. “Sky Deutschland will pay a 6 per cent guarantee fee to News Corporation on the debt facility, and the same rate in respect of a guarantee that News Corporation will make regarding the Bundesliga rights. Overall, management estimates that, when fully drawn, the cash cost of funding will be some €6m higher than it would have been under the old deal. Even so, this is not a very significant cost when weighed against the huge advantages coming from the debt extension and increased wiggle room, we think.”

“We continue to believe that Sky Deutschland is the best structural growth story within our coverage universe,” the bank’s note concludes.

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