#28 Comcast-Fox Battle for Sky heads into Crunch Time: Financials, Subscriber Growth & Rights Strategy

September 20, 2018

There’s finally an end in sight of the transatlantic battle between 21st Century Fox and Comcast for British broadcaster Sky PLC: Back in August Comcast increased its offer to £14.75 per share, valuing the London-based pay TV group at £25.9bn (+/- $34bn). Under British takeover rules, Rupert Murdoch’s Fox, already owning 39% of Sky PLC, has until September 22nd to top Comcast’s all-cash bid. It now appears as if Fox will have the opportunity to come out as the winner of this drawn-out saga, without another bid before this week’s deadline. The U.K. Takeover Panel has announced a blind auction will determine the winner of one of Britain’s longest takeover battles ever. Although best-and-final offer can still be made before Saturday, a “sealed bid will [probably] be the only way to decide the outcome.” 

 

Sky PLC’s stock nearly doubled since Fox first agreed to buy out the remaining stake of the Pan-European pay-TV group for £10.75 per share at a 35% premium back in December 2016. Since then, both Fox (@ £10.75, later increased to £14.00) and Comcast (@ £14.75) received the recommendations to shareholders by Sky’s independent directors to accept their respective bids – resulting in a virtual deadlock.

 

To make things more complicated, Comcast and Disney made also bids to buy major parts of Fox’s assets itself. By virtue of ultimately buying Fox for $71.3bn, Disney would get de facto control of Europe’s biggest satellite broadcaster. A significant say by Disney’s executives in what to bid for Sky by the end of this week has to be assumed. Against the background of being the parent company of ESPN, Disney agreed to sell off Twenty-First Century Fox’s 22 regional sports networks (valued at $15-22bn) to secure DOJ’s approval of its acquisition of the bulk of Rupert Murdoch’s media empire. The positive side, at least Disney’s war chest shouldn’t be completely depleted to secure Sky PLC, the proclaimed ‘crown jewel’ of the entire Disney-Fox deal.

 

Said U.K. Takeover Panel actually pegged its own most optimistic valuation (‘adviser’s value + all synergies’) for Sky PLC at £14.85 per share. As of now, Comcast still seems to be in pole position, but it's not a slam dunk.

 

Howie Long-Short: Closing at £15.65 on Tuesday at the London Stock Exchange, investors still see about 6% upside from the latest bid by Comcast and are seemingly convinced that even the independent regulators undervalue Sky PLC to either Disney or Comcast. At their respective current market valuations, the acquisition of the British company for more than £25.9bn (+/- $34bn) would be a major one for both Disney ($163bn) and Comcast ($173bn), but is appealing to the U.S. broadcasters because it gives them the rare opportunity to expand abroad. Sky’s divisions in UK/Ireland, Germany/Austria, and Italy are the market leaders in the respective national sports rights markets. In a continent that is dominated by ‘soccer,’ the Pan-European group locked in the position of the primary rights holder for the English Premier League (through 2022), German Bundesliga (through 2021), and Italian Serie A (through 2021) for the foreseeable future. Generally speaking, the price level on the European sports broadcasting rights markets is said to be roughly 30% lower compared to North America, but that doesn’t mean Sky’s profitability hasn’t suffered amidst skyrocketing acquisitions costs.

 

 

 

 

The company’s current domestic rights deal with the EPL, that combines for £1.712bn (+/- $2.25bn) per season among all current rights holders resulted in operating profits (i.e. EBIT) for its UK division declining by 14.1% to £1.292 during FY16/17, the first year of the new deal. Thereby, increased rights fees put enormous pressure on margins since revenues grew to £8.600bn (+2.7%) at the same time. [YR1] Cost-cutting moves during FY17/18 (i.e. conceding sports rights other than EPL) enabled the division to grow operating profits again. In Germany, similar trends have been observed as soon as the new rights deal with the 2017/17 Bundesliga season: The company posted an operating loss (-£4m) after just recording the division’s first positive result (£40m) under the previous deal the year before.Sky Germany is now paying €876m (+/- $1.03bn) per season as the primary rights holder (266 out of 306 total games) under the Bundesliga’s current domestic media rights deal, that combines for €1.16bn (+/- $1.36bn) per season for all rights holders. By all accounts, Germany is a traditionally adverse market for pay-TV businesses due to the expansive FTA television landscape and much of the group’s overall top (66%) and bottom line (88%) depends on its UK operations.

 

 

 

Recent development in Italy have been much more favorable: Thanks to a legal dispute between the Serie A and the Barcelona-based MediaPro Group, which ultimately annulled its initial agreement for the exclusive broadcasting rights paying €1.05bn (+/- $1.2bn) per season, Sky Italia - in a joint bid with the OTT platform DAZN - retained most domestic rights (266 out of 306 total games) with just a minimal cost increase (+3.2%) at €973m ($1.15bn) per season. Although, it must be noted noted that reaching subscription milestones could result in the fee increasing by as much as €100m (+/- $117m) per season $116 for Sky Italia and DAZN combined – potentially topping the initially successful bid by MediaPro Group after all.

 

 

Fan Marino: Sky customers in the U.K. have been hurt most by the recent cost-cutting moves in the wake of increased competition for sports rights and skyrocketing acquisition cost. They’ll now need to pay for other channels or platforms when looking for the Golf’s US Open (Amazon Prime), the Tennis PGA Championships, or the Spanish La Liga (both Eleven Sports). As similar concessions on the side of the rights portfolio have been made in Germany since the inception of the new Bundesliga deal (e.g. losing Formula 1 & UEFA Europa League, less exclusivity/games for UEFA Champions League & DFB Pokal), expect operating results to become positive for Germany again in FY18/19.

 

Despite increased competition from digital-only players (e.g. DAZN, Eleven Sports, Amazon) and dropping rights to lower their expenses in several markets, one place you won’t find Sky cutting costs is with domestic fútbol rights. These are not only the most expensive, but the only ones which can reliably drive subscriptions and guarantee a relevant product in the consumer’s view. Soccer is dominating the European sports landscape and comparable properties are hardly found. Whereas the NFL is the biggest sports property in the US, the NBA and MLB/NHL, to a lesser extent, have mainstream appeal. In Europe, pretty much all other sports are relegated to niche status compared to ‘Big Soccer.’ Reporting retail subscriber growth in all three divisions during FY17/18 (UK: +2.1% to 13.0m; Germany/Austria: +4.0% to 5.2m; Italy: +0.6% to 4.8m) despite carrying fewer broadcasting rights provides evidence for the enormous appeal of domestic soccer. It should also make Disney/Comcast executives confident about the long-term prospects of the European pay-TV group after having such rights locked in until at least the summer of 2021.

 

Another big factor for the attractiveness of Sky PLC for both Disney (via Fox) and Comcast is the potential as content distribution platform in Europe for their respective film and movie studios (i.e. Walt Disney Studios, 20th Century Fox, Universal Pictures) as they increasingly compete with Netflix and similar SVOD services in the general entertainment space. Therefore, there's an analogy to another asset of 21st Century Fox that made Rupert Murdoch's media empire worth $71.3bn to the "Micky Mouse - House": With Star India also being a (fully) owned subsidiary of 21st Century Fox, one of India’s largest entertainment and sports networks is also part of the Disney/Fox deal. STAR Sports was recently in the news of the Western world, as it secured the global linear and digital broadcasting to the Indian Cricket League (IPL) for a whooping $2.55bn over the next five years (2018-23) – an auction in which Facebook also participated with an aggressive $600m bid for the IPL’s global digital rights. Now, Disney seems determined to secure full control over the second former Fox-asset outside of North America.

 

 

Editor Note: This column was published in an edited version on JohnWallStreet.com, a daily newsletter covering the intersection of sports and finance. If professional teams & stadiums, television networks, and companies in the area of apparel/footwear, equipment, ticketing, or content trade on Wall Street, and have a sports angle, it’s in their wheel house. Get your daily dose of sports business with Howie Long-Short (financial analyst) and Fan Marino (sports fan) each providing their expert opinions on the day's stories: Subscribe here to the JWS Newsletter. You can also follow me (@yannickramcke) and the friends over at JohnWallStreet (@JohnWallStreet) on Twitter.

 

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