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Volume 6 No. 214
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Sky Shares Tumble Following Loss Of Champions League Rights To BT

Shares in Sky Broadcasting "took a battering" Monday after rival BT snatched the U.K. Champions League TV rights, according to Pan Pylas of the AP. The loss of the rights, which it had shared with terrestrial broadcaster ITV, "represents a big blow for the satellite broadcaster as it has built its business over the past two decades largely on the back of its acquisition of sports rights." Football rights "are one of the main reasons why the broadcaster has seen its subscriber base rise to around 10 million." Investors are worried Sky, whose biggest shareholder is Rupert Murdoch's 21st Century Fox, one of the two units created following the split of News Corp., "will face additional financial pressures to maintain its array of sports rights and that some subscribers may switch to BT." Sky shares closed 10.9% lower at 829 pence, meaning around £1.5B ($2.4B) "was wiped off the value of the company." Spreadex trader David White said, "With analysts and commentators describing this as a game changer, finding reasons to own BSkyB seem harder to come by today than before" (AP, 11/11).

ANALYSTS WEIGH IN: In L.A., George Szalai reported BT's deal "further escalates and intensifies the competition for sports TV rights in Britain." Sanford C. Bernstein analyst Claudia Aspesi wrote, "This signals the end of peaceful co-existence in U.K telecom and pay TV." UBS analyst Polo Tang "echoed the sentiment of an escalation." Tang: "The move by BT will lead to broader concerns about rising content costs, particularly for the next cycle of Premier League rights. Investors will also be wary of an aggressive retaliation by BSkyB, such as free broadband that could impact the broader U.K. triple-play market." Analysts "are split though on which company will be hurt more after the BT deal for European matches." Aspesi: "For BSkyB, the implications are clearly negative. In the near term, Sky saves money, although it may choose to reinvest some. Over time, however, if the cost of key rights escalates beyond what it can afford, this begs the question of what Sky stands for." Tang, however, "highlighted that BT's Champions League rights win" came at a "massive cost." Tang: "BT may struggle to break even on the incremental cost" (HOLLYWOOD REPORTER, 11/11).

BT SHARES FALL, TOO: In London, Fildes & Johnston reported shares in BT "also fell" Monday, losing 2.2% to 363.8 pence, "despite the company insisting that it could afford the rights" without changing its current financial outlook. ITV was down 2.9% to 185 pence, although its shares "have risen more than" 100% over the past 12 months. Sky is "thought to have run close to its rival during the bid process, which started last Tuesday and continued throughout the week." The battle "represents the biggest shift in the telecoms and media sector for years" and the aggression shown by BT suggests that it has greater ambitions than simply shoring up its broadband customer base with the offer of live football (LONDON TIMES, 11/11). In London, James Titcomb reported analysts at Espirito Santo said that the deal saw BT Sport promoted from a "nice to have" to a "must have" for many households. Analysts said, "Clearly emboldened by the early success of its sports offering, BT now moves firmly into position as a powerful challenger to Sky's UK sports content hegemony." Meanwhile, Westhouse Securities said that "there was an upside" for Sky and ITV, which could "reinvest the money they would have spent elsewhere." Westhouse Securities said, "Our overarching reaction in the case of both [Sky] and ITV is relief that they have maintained their financial discipline and not been tempted to pay more than they have calculated that these rights are worth" (TELEGRAPH, 11/11). In London, Daniel Thomas reported analysts "immediately questioned whether it had spent too much, and whether BT could justify a price that Sky could not reach." The shift in strategy "raises questions for investors who have seen a traditional telecoms stock make a big money move into the heart of the rambunctious media market." Bernstein analysts said, “Some BT shareholders may have preferred higher dividends and a more peaceable environment.” BT Consumer CEO John Petter described the rights as “value for money” given the size of the viewing figures. He said they would be a “tipping point” for BT’s strategy of gaining, retaining and upgrading broadband customers, as well as boosting revenues from subscribers and wholesale. The deal "is the first major strategic play" by BT CEO Gavin Patterson, who "took over from the successful tenure" of Ian Livingston in September. Livingston "was mainly applauded by shareholders -- and richly remunerated as a result -- for his efforts to cut costs at the once bloated British monopoly" (FINANCIAL TIMES, 11/11).

U.K. SPORTS RIGHTS SOAR: In London, Daniel Johnson reported although Sky "has ridiculed its new rival" BT Sport for describing its capture of Premier League football as a ''game changer,'' sources close to BT have described its success in capturing the Champions League and Europa League ''the real game changer" (TELEGRAPH, 11/11). Also in London, Henry Mance wrote Sky "made one final attempt" to get the rights on Friday, but "was unable or unwilling to break back into the process." For the Murdoch family, which indirectly controls 39% of BSkyB, "the defeat might feel like payback time." The Murdochs "were the pioneers of investing heavily in sports rights" and had "challenged BT on its own turf by offering customers broadband." But BT "has turned both tactics on Sky" (FINANCIAL TIMES, 11/11). The FINANCIAL TIMES also wrote football pundits like to talk about an “aura of invincibility.” Once lost, "it is tough to regain." Is British Sky Broadcasting "about to lose its own superior air?" That fall "suggests a lot of nasty things will happen" to Sky in '16. Assuming the enterprise value multiple stays flat, its '16 earnings before interest, tax, depreciation and amortization would have to be £1.8B ($2.9B), rather than just under £2B ($3.2B) "as the market had been expecting." How "could that happen?" Residential subscribers, the source of 82% of revenue, "could switch to BT." Those that remain "might start grumbling about prices." Advertisers "will have fewer games against which to advertise." And BT "will spend big on marketing, and BSkyB will follow." In the worst case scenario, BT’s success with the Champions League "emboldens it to bid up for English Premier League rights." The contract renewal process is not due until '15. But BT bid 130% over the previous rate for the Champions League. Inflation at that rate would leave BSkyB paying more than £5B ($8B) for the Premier League rights. That "really would be bad news" (FT, 11/11).

WINDS OF CHANGE: In London, Tony Evans wrote "the nature of watching football has changed over the Premier League era." Most fans "now see the game through the lenses of the television companies." Only a tiny proportion of those "who would bill themselves as football addicts actually go to stadiums and watch the game live." Likewise, "income from match-day revenue is becoming an increasingly smaller proportion of the overall pot." It would "be trite to say that match-going supporters do not matter." Atmosphere "adds enormously to the experience of football, whether viewed from a settee or a stand." However, there is "increasingly less justification for squeezing every last penny out of the people who come through the turnstiles." Fans inside the ground "are important: the cash they generate less so with every new broadcast contract." The BT Sport deal "will delight everyone in the game." For owners, execs, agents and players, news of the contract is "like the distant sound of sleigh bells to a five-year-old: Christmas is coming and those stockings will be bulging." Who "cares about the Tiny Tims on the terraces?" (LONDON TIMES, 11/11). The FINANCIAL TIMES also wrote the "relatively small dip in BT’s share price suggests that investors also understand the potential reward." That "began to show through in last month’s second-quarter results when the telco reported better growth for BT TV and the lowest consumer line loss for five years." There were also 156,000 new retail broadband customers in the quarter, or more than nine in 10 of the overall broadband market net new customers in the period. Patterson promised then to “stay disciplined” over content purchases, and BT "is not changing its financial guidance as a result of the latest deal: it still envisages growth in both earnings before tax, interest, depreciation and amortisation and free cash flow in 2014-15" (FT, 11/11).