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Sky numbers trimmed by analyst

September 14, 2017

This hasn’t been the best of weeks for pay-TV giant Sky. The UK government decision to – probably – kick the planned acquisition by 21st Century Fox into the long grass of a Competition & Markets Authority investigation, doesn’t help, nor does a report issued Sept 13 by equity analysts at Berenberg Bank.

The bank recommends investors ‘Hold’ their stakes, and suggests a share price target of £10.75 (currently they stand at about £9.53). But the bank is also cutting Sky’s Earnings Per-Share (EPS) numbers, not least because of worries about the cost inflation relating to football’s TV rights.

The bank’s report says: “We are reducing our estimates to reflect Sky’s continued investment in the customer proposition across its European footprint. These investments relate to losses on mobile (not previously in our estimates), increased investment in content costs in the UK and Germany in particular, higher marketing of Sky Pro and SkyQ (which are being capitalised but which will result in steadily increasing depreciation charges) and investment in the OTT service in Spain, which has now officially launched. We cut 2018 EPS by 8 per cent and 2019 by 11 per cent.”

Berenberg are also worried about the ever-rising costs of acquiring high-profile sports content. “If Sky were not in the current bid scenario, tensions would be mounting over the upcoming auction process. The US online giants appear to be interested in live sports: Amazon outbid Sky for the ATP tennis rights in the UK, and outbid Twitter and Facebook to offer Thursday night NFL matches, reportedly paying up to 5x what Twitter paid for the previous season. Meanwhile, Facebook was recently outbid for IPL Twenty20 cricket rights in India. It is true that Premier League rights are, in absolute terms, a substantial investment, but the ability to bid for individual packages limits the financial commitment. Were Sky to lose any more packages, this could undermine its appeal to pay-TV customers. The recent auction of English Football League rights resulted in a 36 per cent increase in the cost (albeit for an increased number of matches), which is consistent with our assumption of Premier League cost inflation (+35 per cent).”

The bank also includes the Government’s decision to – probably – see the Fox bid for Sky examined. “While it was the consensus view that Karen Bradley, the secretary of state for DCMS, would likely refer the deal on plurality grounds, it was a surprise to see the question of broadcasting standards rear its head again, which suggests that new information may have emerged that preceded this latest decision. Fox has [now less than] 10 days to make representations, but clearly the risk associated with the transaction is rising, as reflected in the share price movement.”

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