The decision by UK media regulator Ofcom to investigate the way in which the English Premier League sells domestic rights managed to send Sky’s share price up a very healthy 43p to £8.90 in robust trading. The market’s sentiment reflects the general view that Sky might well emerge from the review in a better position than today.
Investment bank Berenberg gave the reasons, although also urged caution: “On the one hand, it could push back the timing of the rights auction, which we had anticipated in early Q1 2015, thus delaying a potential negative catalyst for Sky; on the other, it opens up new avenues for worry.”
The Ofcom action follows on from a complaint from Sky’s arch-rival Virgin Media which suggested that the way the football TV rights are sold results in higher prices for sports fans.
Berenberg says it disagrees with that proposition. “Our analysis shows that, on a per customer basis, Premier League rights are cheap relative to other markets: In our view, the high price of football on TV reflects the fact that Sky TV customers are forced to ‘buy through’ the basic package, while the wholesale cost is based on the retail price of that combined package (basic + premium) even though BT and Virgin Media must pay separately for basic channels.”
The bank’s report says that while the Premier League auction might well be delayed for a while, the counter-argument is that the League could well go ahead with its upcoming auction. Should Ofcom then find that the auction WAS in breach of new rules, then the League could simply hold a new auction for the British rights.
“A greater supply of matches would have varying implications for Sky: It could allow Sky could maintain the number of matches it offers, while allowing third-parties (BT and possibly others) to gain more,” says Berenberg. “However, if Sky no longer offers a clear majority of matches, we think the “need” to have Sky for football would reduce, particularly given that it loses Champions League from next season. Meanwhile, if Sky buys more rights, thus maintaining its position as “the home of Premier League” this would surely come at an increased cost, as clubs will need compensation for lower takings at the stadium. Either way, we think that Sky faces continued Premier League pressure.”
Berenberg is recommending that clients ‘SELL’ Sky stock, saying: “Amid questions on the Premier League, and rising competition including quad-play from all its main competitors, we maintain our Sell rating.”