Credit Suisse cautious of risks at BSkyB as Premier League auction looms
Credit Suisse retained a negative stance on BSkyB (Sky) due to risks from the upcoming English Premier League auction and the political debate over UK retransmission fees, but was more optimistic on Sky Deutschland, which the UK arm is expected to acquire this month.
FTSE 100
8,078.86
17:14 25/04/24
Sky
1,727.50p
16:34 06/11/18
Sky Deutshland AG
€6.81
09:04 02/10/15
A new price target from the broker of 630p on the enlarged ‘Sky Europe’ is almost a third below the current share price.
The TV rights for the 2016-2018 seasons will be auctioned early next year, with CS foreseeing "few good outcomes" for Sky, which is expected to compete with BT on the same aim of acquiring the majority of packs.
“We think the only bullish outcomes for Sky would be: Sky and BT both decide against bidding aggressively; or Sky lodges a ‘blockbuster’ bid to buy six out of seven packs, in an effort to force BT out of the wholesale content market,” wrote analyst Omar Sheikh.
“We see neither as likely and continue to model a 60% increase in Sky's [Premier League] costs for five packs.”
The debate over retransmission fees has grown louder in recent weeks, after UK broadcasters stepped up lobbying for the introduction of a "retransmission consent" payment regime from pay-TV distributors like Sky to free-to-air broadcasters like ITV, which Sheikh calculates could result in a total payment of over £400m per year over the next decade.
“Sky will of course fiercely resist this, and the outcome will depend in large part on the government's desire to skew regulation in broadcasters' favour,” he added.
New CS forecasts put Sky shares trading at 16.8 times 2015 earnings per share, which Sheikh feels “looks high” in the context of the auction risks and the relatively modest 10% annual growth in earnings before interest, tax, depreciation and amortisation (EBITDA) and 9% in earnings per share from 2015-17.
On Sky Deutschland, the analyst has rebased to a more conservative set of forecasts but said he expects the pace of subscriber growth to continue to at least meet market expectations.
“As the sole provider of premium pay TV in one of the most under-penetrated markets in Europe, Sky Deutschland is one of the few secular growth stocks in European Media.”
At BSkyB's shareholder vote on the acquisition of 21st Century Fox's controlling interest in Sky Deutschland, which is due on 6 October, Sheikh expects the transaction to be approved, and for investor attention to then turn to the possibility of a control premium eventually being paid for Sky Deutschland minorities.
“We think this is possible, but unlikely to be on the agenda until after the outcome of the UK's FAPL auction is known.”
A new 630p target puts the enlarged group on 8.5 times 2015 enterprise value over EBITDA, in line with historical averages.