A report from investment bank Berenberg says there is a “likelihood of substantial cost inflation in the Premier League rights auction…[and we] include 60 per cent cost inflation in our estimates”. The report – The Final Countdown – advises clients to “SELL” their Sky shares ahead of what is anticipates will be a fall from today’s share price of about $9.18 to an expected £7.80 once the inevitable extra costs are factored in to Sky’s prospects.
The bank says the recently announced Ofcom regulator’s investigation is a “red herring”. “The fact that Ofcom will investigate whether the way that the rights are sold is leading to artificially high prices for consumers does not change our view that the cost of the rights is set to increase. The idea that an increased number of matches sold for TV broadcast will lead to lower prices runs counter to the fact that in each of the last auctions there have been more matches sold, yet the price has increased substantially each time,” says the bank’s note.
“More live matches equals more cash payment: Indeed, with an additional 14 matches being sold under the new tender, we expect the Premier League to require additional income to compensate it for lower gate receipts (the 14 matches have been pulled from the Saturday 3pm slot). Equally, with more matches available, the onus is on Sky to maintain a clear majority of matches or face loss of consumer appeal of its core Sky Sports product.”
“Sky is more leveraged to the auction than ever before: With substantially increased leverage following the Sky Europe deals, and even after receipt of the Sky Bet proceeds (a good price, but for Sky’s fastest growing business), Sky is more than ever dependent on a good outcome in the Premier League rights auction. Sky Deutschland (SkyD) is still burning cash, and has seen downgrades over the last year, while Sky Italia looks interesting on paper, but despite access to News Corp resource and talent, has had poor results. Sky management faces challenges on all fronts, in our view,” says the bank’s blunt view.