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SBD Global/July 28, 2014/Finance

U.K.'s Sky Pays 21st Century Fox $9B For Sky Italia, Sky Deutschland

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Sky has agreed to pay 21st Century Fox £5.3B ($9B) for its German and Italian satellite broadcasting interests, "in a bid to create a 'world-class multinational pay TV provider,'" according to Alex Spence of the LONDON TIMES. The deal would help "boost Fox's hopes of acquiring its rival Time Warner," but Sky will have to convince its "free-float shareholders that it is in their interests." Sky has agreed to pay Fox £2.5B ($4.2B) for Sky Italia, lower than "some analysts had feared it would pay for the troubled asset," and £2.9B ($4.9B) for its 57% stake in Sky Deutschland. Fox will receive £4.9B ($8.3B) in cash along with Sky's 21% stake in the National Geographic Channel, valued at £382M ($648M) (LONDON TIMES, 7/25). In London, Henry Mance reported the transaction will "require approval by a majority of BSkyB’s independent shareholders," because Fox owns 39.1% of the U.K. pay-TV company and is "therefore considered a related party." It may also "face scrutiny from European regulators." The price for Sky Italia represents "nearly 10 times its earnings before interest, tax, depreciation and amortisation" of €312M in the year to June. Bernstein analysts called the price "acceptable." UBS said it was "lower than expected." On Friday, Sky "also reported adjusted revenues" of £7.61B for the year ending in June, in line with the £7.62B expected by analysts surveyed by Bloomberg. Its broadband business was "again affected by competition from BT, with only 50,000 net new customers in the fourth quarter." Statutory earnings per share were 55.4% for the year, down 8.7% from '13, "due partly to higher football rights costs" (FINANCIAL TIMES, 7/25). In London, Russell Lynch reported "the most significant deal for the company since Sky merged with British Satellite Broadcasting" in '90 sees Sky "virtually doubling its customers to 20 million at a stroke." Sky also "created a European powerhouse, with a leading pay-TV business in three of Europe's four biggest markets and lifting its number of customers from 11.5 million to 20 million." Revenues will surge nearly 50% to more than £11B ($18.7B) and the company "gains a new source of growth" away from the U.K. Media analyst Claire Enders said that the deal showed Sky was moving to "build its business beyond Britain and growing competition with BT." Enders: "It's now focused on transporting its technology and its production skills into other markets where there is demand for cutting-edge TV" (INDEPENDENT, 7/25).

'GREATER HEADROOM': Also in London, Juliette Garside reported the merger better positions Sky to "compete with John Malone, a longtime Murdoch rival who is building Liberty Media into Europe's largest cable television business with control of Virgin Media and a slice of ITV" in the U.K. It also provides a "buttress against the growing distribution might of Apple, Google, Amazon and Netflix," which are using the Internet to build multibillion-dollar video businesses. Numis bank analyst Paul Richards said, "The headroom for growth in Italy and Germany is much greater. BSkyB has executed really well in the U.K. over the last decade or two and is looking to export that capability into other markets in Europe" (GUARDIAN, 7/25). In N.Y., De La Merced & Scott reported the focus on the deal from analysts and investors "centered, perhaps unsurprisingly, on how it could change the dynamics of 21st Century Fox’s quest to win over Time Warner and create an enormous media conglomerate" with assets as diverse as HBO, Warner Bros., Fox News Channel and the 20th Century Fox film and TV studios "living under one roof." Cash from the Sky deal "could be added to a huge financing package that would support a Time Warner purchase" (N.Y. TIMES, 7/25).

ANALYSTS WEIGH IN: In L.A., Georg Szalai reported analysts mostly focused on the "financial flexibility" for Sky after the deals, including its ability to bid for Premier League rights next year when BT is "expected to once again bid aggressively." Jefferies & Co. analyst Jerry Dellis said that Sky's decision to "partly fund the deal by issuing additional stock to investors" was "a mild surprise" but leaves the "post-deal BSkyB balance sheet in a stronger position." UBS analyst Polo Tang said, "We are positive on the creation of Sky Europe, as it will create a scale player with the ability to acquire pan-European rights and deliver faster growth." Richards "also focused on synergy promises." He wrote in a report, "This level of synergies is consistent with our upper-end forecasts but will be achieved more quickly than we had expected" (HOLLYWOOD REPORTER, 7/25). REUTERS' Quentin Webb opined this has "been mulled for years, and is in a sense a housekeeping exercise." The businesses have common branding and "already collaborate on technology and productions, while executives flit from one to another." But "Sky Europe" is "more than a tidy-up." Sky cuts its reliance on Britain, where it is now "fighting the deep-pocketed BT, and gets new growth potential." More than half of Britons "already pay for television." The comparable figures are 19% in Germany and 28% for Italy. The "bigger group should be able to better hold its own against tech, telecoms and content giants" (REUTERS, 7/25).
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