“Complete U-turn” by BSkyB
August 8, 2014
A major report on “Rupert, the Bear” and BSkyB’s expansion into Europe, from Berenberg Bank reads: “BSkyB is going from a relatively simple, cash-generative business with an underleveraged balance sheet, returning cash to shareholders, to a highly-leveraged, complex business that will need to lower leverage before it can consider a return to buybacks. In some ways, it is surprising that there was not a stronger reaction to the deal, given this volte face.”
Senior analyst Sarah Simon gives full marks to the absorption of Sky Deutschland and predicts further strong growth and success for Sky’s new Munich-based arm. But the bank says Sky Italia is a horse of a very different pay-TV colour.
“Sky Italia,” says the bank, “was formed from the merger of Telepiu (a former NetHold business that was then sold to Vivendi) and Stream (a small pay-TV operator nominally based on the cable platform, and in which Telecom Italia was briefly invested). The business looks and smells like BSkyB in the sense that it relies on satellite distribution, but has some marketing co-operations in terms of bundling with Telecom Italia. It does not have its own telecommunications business, however, so the economics of bundling are more about gaining customers than inter-service synergies.”
“Pay-TV penetration in Italy is just over 30 per cent, suggesting potential for significant increase, although it is important to understand that this is not a single-player market. Whereas BSkyB dominates premium content in the UK (and wholesales to other platforms) in Italy, the market is split between Mediaset (controlled by Silvio Berlusconi’s Fininvest) and Sky Italia. The latter is definitely the premium product, with more channels, more HD, a Sky+ product and portability, etc (much like BSkyB), and consequently commands a higher price, but Mediaset offers the average householder access to the top Serie A matches and to Champions League.”
“This is because in Italy most rights are sold on a platform-by-platform basis – so where Sky Italia acquires satellite rights, Mediaset acquires DTT. Thus, while not wishing to suggest that Mediaset offers as extensive an offering as Sky Italia, for the average Italian wanting a bit more premium TV to go with his football, Mediaset Premium will suffice. Mediaset has also launched a Netflix-style offer, Infinity, to appeal to even lighter users. In an environment where the average consumer has been squeezed, it is hardly surprising that Mediaset Premium has done better than Sky Italia. Indeed, in 2013, Sky Italia’s revenues declined by 2 per cent, whereas Mediaset Premium succeeded in increasing its subscription revenues by 10 per cent,” states the bank’s report.
Berenberg questions the BSkyB move, and reminds investors that ProSiebenSat.1 sold off its international TV businesses having failed to secure much by way of cross-border synergies. The bank says it fears that the upcoming Premier League football rights might cost BSkyB 50 per cent more to secure.
Consequently the bank concludes that “BSkyB is shifting from being a low leverage, predictable business that is returning cash to shareholders. The new Sky will be complex, will have a key football rights auction in each of the next three years, and will be substantially more leveraged. We do see opportunity from the German business, in particular, but one can invest in Sky Deustchland standalone. Ultimately, we wonder why, having been so enthusiastic about European pay-TV in the past, Rupert Murdoch is now reducing his exposure to this industry and extracting $7.4 billion in net cash. We reiterate our Sell rating and set a new price target of 800p.”