Market Insight

BSkyB confirms deal to buy Sky Italia and Sky Deutschland

July 25, 2014

Tim Westcott Tim Westcott Director, Research and Analysis, Programming

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BSkyB has agreed to buy 100% of Sky Italia and 57% of Sky Deutschland from 21st Century Fox in a £4.9 billion deal that will create a pan-European pay TV operation with 20 million subscribers. The deal, which has been widely expected, will result in £200 million annual cost savings and give BSkyB an enlarged addressable market of 97 million homes, 66 million more than can been reached in the UK and Ireland. 

BSkyB will pay £2.45 billion for Sky Italia, of which £2.07 billion will be in cash and the remainder funded through the transfer to Fox of BSkyB's 21% stake in National Geographic Channel International. For the Sky Deutschland stake, BSkyB will pay £2.9 billion (€3.6 billion) in cash or €6.75 a share, valuing the operation at £5 billion. Sky Deutschland's closing share price on 24 July was €6.66.

Remaining shareholders will be offered a voluntary cash offer for their shares. Sky said that core synergies would be in production and commissioning, back office and IT and set-top box development. Additional revenue opportunities will be created through the enlarged addressable market for products like Sky Store and Sky Adsmart, its targeted advertising service.

Our analysis

Strategically the core aspects of this deal are not the potential synergies and cost savings that the enlarged group will have but the competitive positioning and opportunity for roll-out of multi-service offerings across the three markets. With OTT services like Netflix and Amazon easily porting their business model across international borders, the immediate threat to traditional operators is the ability of OTT to rapidly build international scale. Although both Sky Deutschland and Sky Italia already have stand-alone OTT services, a core plank of the strategy for the new Sky entity will be roll-out of a unified stand-alone OTT offering across the markets, modelled on the UK's Now TV. This will give Sky a strong defensive position against OTT entrants. Further, Sky will roll out its triple-play strategy across the three markets, with a particular initial focus on Italy where there is no cable competition and limited IPTV development. An ISP acquisition, most likely Fastweb with which Sky Italia has an existing relationship, now looks like a distinct possibility.

In terms of synergies, Sky says that production cost savings can be made, particularly around coverage of major sporting events which today are filmed by three seperate crews. Further, common channel brands can be rolled out simultaneously and original programming can be funded and used across borders. The three platforms are already co-producing a 10-part drama series called Diabolik. The enlarged Sky Europe will have a combined annual programme spend of £4.6 billion and revenue of £11.7 billion; more than 50% greater than Sky UK alone.

Managers admitted this morning that the merged entity is unlikely to gain an additional advantage in the acquisition of premium sports rights or first window rights to Hollywood movies. These rights are typically awarded on a territory-by-territory basis and Sky faces strong competition from companies like BT, Mediaset and Deutsche Telekom. However, there are other areas where the combination could make its extended footprint work. Firstly, in negotiating rights for competitions which are not in the top tier of premium events in each country and where rights holders may be open to a multi-territory deal. Fox has already made some moves in this direction by acquiring multi-territory rights to the German Bundesliga, the MLB and NFL. Other sports like rugby, ice hockey and basketball could offer some potential. 

Second, Sky could position itself as a partner for sport rights holders, creating the coverage and handling the distribution of the event worldwide. This is a strategy 21st Century Fox is already following with Dutch football, having bought into the marketing company behind the league and selling international rights. BSkyB will show the Eredvisie in the UK next season. This approach provides a defence against inflation of rights costs.

Third, Sky has shown itself ready to build the brand of some sports by giving them greater TV exposure. The Premier League could arguably fit into this category, but a more recent example is cycling, where Sky finances the UK-based professional team which has its name and has been heavily involved in raising the profile and success of the sport. Rupert Murdoch has never been averse to buying up and reorganising sports to make them more amenable to exploitation on TV. The new European business could be combined with Fox Sports in the USA, Asia and Australia and Star Sports in India to form a global platform. Formula One, an event typically well suited to pay TV, is rumoured to be up for sale and is an obvious candidate for acquisition - though it is already an established and therefore expensive event. 

The jewel in this deal in terms of short-term growth is clearly Sky Deutschland, which has seen a dramatic turnaround in its fortunes in the past few years and continues to grow strongly. By contrast, Italy has seen a downturn in pay TV uptake and Sky Italia has been fighting customer losses. The longer term opportunity to roll-out triple-play in this market is thus key. The cable industry has shown over the past decade that significant revenue and ARPU growth can be achieved even with a declining customer base. Couple with the scale benefits and the fact that the deal is expected to be strongly cash accretive within two years make this a powerful move. Sky expects the deal to close year end pending EU approval.

Sky also announced financial results for the quarter ending June 2014, the company's fiscal full year, showing a strong return to growth. TV customers where up 76,000 in the quarter ending a strong run to give an annual growth of 264,000. Broadband growth was less impressive as Sky continues to battle BT. It added just 50,000 new broadband customers in the quarter or 341,000 in the year and 87,000 telephony customers or 481,000 in the year. ARPU was up strongly by £5 in the quarter or £7 in the year to £576 and churn stable at 10.7%. HDTV was also up strongly by 76,000 in the quarter for an annual growth of 456,000. More than half the customer base (5.6 million) now have connected boxes. Counting its triple-play operations, Sky now services 34.7 million subscription products.

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