Sky mergers: “Makes sense, but SELL’
May 30, 2014
A 14-page report from investment banker Berenberg on the prospects of BSkyB’s potential acquisition of Sky Deutschland and Sky Italia, which is in the bank’s view “in many ways not surprising” nevertheless, creates considerable food for thought for analysts at the bank.
The bank cites slowing organic growth from BSkyB and increasing competitive and market pressures in its home business.”It makes sense that the company is seeking to diversify its risk and look to new pastures for growth and risk diversification.” The bank states that Germany represents a “huge opportunity” for BSkyB, although is more concerned for Sky Italia’s overall prospects.
The report, sent to clients early on May 30th, looks closely at the non-broadcasting side of BSkyB’s business, not least its ADSL and broadband fibre costs, and revenues, and says it is not a pretty picture for BSkyB. Berenberg is also anxious about the prospects – ever – of BSkyB winning access to BT Sport’s valuable football content.
The bank’s staff recently met with BT senior executives. “As far as the Champions League is concerned, BT management was keen to stress that it sees these rights as having de-risked its Premier League bid. The message to the market is that BT will not get drawn into a silly bidding war, and can afford to step away from the Premier League (unlike BSkyB, which cannot). While that may be taken positively for BSkyB too, in the same breath BT has said that it will invest some of the “billions” of savings that it expects to make, and will spend them on consumer growth initiatives. One of those is likely to be mobile, but we expect the other to be more content. With no wholesale deal likely, we believe that competition for the Premier League results will lead to substantial further cost inflation,” states Berenberg.
The bank’s analysts take a cost-per-household when examining the various top-tier football packages available over Europe. In the UK the cost of viewing Premier League football works out at “71” when spread over 14.3 million homes. In Germany it is much higher (“95”) when apportioned over just 4.3 million homes, and 35 per cent higher than the UK. In France it is 14 per cent cheaper, at “60”, while Spain is hugely expensive (at “107”) and a 51 per cent premium over UK costs, while Italy is 23 per cent higher than the UK (at “87”) for its 8.5 million pay-TV homes.
In other words, implies the bank, the upcoming Premier League costs will rise, both in terms of inflation but also substantially and perhaps by around 60 per cent.
Hence the bank’s view that BSkyB is looking outside the UK for “salvation” and by diversifying into a set of markets that it knows well, and where there are plenty of former BSkyB execs in gainful employment.
But, “for BSkyB shareholders, the deal would also represent a material change in the profile of their investment. We recognise that an investor in BSkyB today likes it because it is generating steady cash flow, has a strong balance sheet and is returning cash to shareholders. Equally, a shareholder in BSkyB clearly has a less negative view on the market environment than we do, and is not concerned about major rights inflation,” says the bank, and sticks with its “SELL” recommendation on BSkyB stock.