Investment bank Jefferies has downgraded Scandinavian streamer Viaplay to an ‘Underperform’ rating. The bank’s note to Viaplay investors does not make pleasant reading.

Jefferies says that incoming CEO Jorgen Lindemann must deal with the new reality of large programming commitments, higher sports rights competition, higher funding costs, a lack of scale and a diminished consumer willingness to pay. “We note the recent 60 per cent de-rating, but we still see downside to earnings and valuation as the business course corrects away from internationalisation to a viable path.”

The bank adds: “The stock is down 60 per cent since the June 5th [trading] warning; why downgrade now? Because we know three things now that we didn’t know before: 1. Viaplay has real balance sheet constraints; 2. Its best route to consumer relevance (i.e. sports rights), despite industry maturity, is seeing accelerated fragmentation; and 3. The incoming CEO, Jorgen Lindemann, was never an advocate of the internationalisation strategy the displaced CEO has leveraged the company to.”

“Viaplay has increased balance sheet constraints and a rising cost of capital. Viaplay has net debt of SEK 2.5 billion [€214m] and negative short-term earnings. Indeed, following the June 5th warning we now see Viaplay burning cash for two more years (SEK -2.5bn / -SEK 0.9bn in 2023/24). It isn’t at risk of breaching its private bond covenant (peaking at 2.8x vs. a 3.5x covenant), but will now be closely constrained by it. Accessing fresh capital would be too dilutive,” says Jefferies.

The bank says Viaplay will struggle to cement a mass-market position. “We see the top-3 slots in a typical household’s SVoD roster being taken by global giants Netflix, Disney and Amazon. Viaplay will likely never penetrate this echelon; it finds itself fighting for a final slot with similar global giants (e.g. Apple and YouTube). Within its armoury, its originals content can secure a niche position at best. In sport, Viaplay has a path to mass-market share, but now faces an accelerated incursion by the same global giants into the category. We therefore see structural risk to margins medium term.”

“Lindemann will likely forever change Viaplay,” says Jefferies. “After all, in his tenure as CEO of former ParentCo, MTG, he advocated convergence for Viaplay, not internationalisation. He must now manage the business for the c.SEK 57 billion in total content commitments (>10x the equity value) he faces over the next 10 years while also battling for relevance with inferior access to capital. This should lead to retrenchment. We therefore expect the July 20 strategy update to prelude a deeper cost-cutting programme, a suspension in expansion, a move to wholesaling of sports rights and the launch of an AVoD product.”

Jefferies bottom line is that it forecasts 3.3 million international subscribers by 2025, a dramatic cut from the bank’s previous 5.6 million-6 million expectations. It expects 5.3 million Nordic subscribers (unchanged) and lower ARPU growth as Viaplay struggles to drive price acceptance.

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Tags: Jefferies, subscribers, viaplay