Kate Bulkley, Media Analyst.

Sky Europe in the spotlight

By Kate Bulkley

Broadcast News

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For Broadcast July 31, 2014

BSkyB deal may not be a bargain, but is of value, says Kate Bulkley

Summer is traditionally a great time to shop for bargains. The ‘Sale’ signs are too tempting to ignore and you hope that the item you’ve had your eye on is included in the marked-down section.

BSkyB has dipped into its purse recently and picked up a bunch of items, but whether or not they are bargains remains to be seen.

It is splashing out $9bn (£7.4bn) to buy 57% of Sky Deutschland and all of Sky Italia, which will in turn generate a cool $7.2bn (£4.3bn) for 20th Century Fox.

So is the BSkyB deal just a chess piece in the greater Murdoch-Fox empire-building game? Well, Fox will retain a significant stake in the new Sky Europe, and the fact is BSkyB has been ogling control of Sky Deutschland and Sky Italia for the past decade.

Creating the largest pay-TV operator in Europe is also BSkyB boss Jeremy Darroch’s big strategic play at a moment when the company is looking somewhat provincial, given the multi-territory reach that is the sine qua non of Discovery Communications and Liberty Global, not to mention Netflix and Amazon.

A former finance director, Darroch also likes the deal’s rationale, with cost savings from operating with 20 million subscribers across five countries (UK, Germany, Ireland, Italy and Austria). For example, buying set-top boxes and routers.

He forecasts the new Sky Europe will save £200m annually within two years of the deal closing.

That timeframe, and the fact that BSkyB will take on a lot more debt to do the deal, has spooked the market, sending BSkyB’s shares down nearly 5% on the day of the deal. BSkyB’s interest payments could triple to £400m per year, says Berenberg Bank, and new equity issuance will dilute earnings per share.

Also, Sky Italia is seen as the weak sister, given it has lost 200,000 subs in the past three years.

That said, debt is cheap right now and from an integration perspective, the hurdles look manageable: both the German and the Italian companies already use Sky branding and their chief executives were both senior execs at BSkyB before taking on their current roles.

The product roadmap that BSkyB has rolled out – like broadband bundling and OTT service Now TV – can be replicated more efficiently under the Sky Europe umbrella. Given slowing TV take-up numbers in the UK, where pay-TV penetration is at 50%-plus, Sky Europe offers room to grow – pay-TV penetration in Italy and Germany is around 30%.

It looks like Murdoch & Co have – once again – elegantly moved chips around the TV board to promote a variety of interests both at Fox and BSkyB.

The deal makes BSkyB a powerful pan-European player and it still has funds to diversify in other areas, like buying its first indie, Love Productions, or its second Silicon Valley investment, in groundbreaking virtual reality software company Jaunt.

Sky clearly has aspirations to be a major content creator and programming innovator as well as a distributor of channels and communications products, and Sky Europe gives the whole shebang a bigger arena to grow. Sky Europe may not be of the bargain basement variety, but it does make a lot of strategic and financial sense for both BSkyB and 21st Century Fox.

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