There are two good reasons to look at shares in media group Sky (SKY) today. While there is excitement about the company extending its Premier League broadcasting rights to 2022 at a lower price, investors should really focus on that fact Sky’s shares are trading above the £10.75 takeover price offered by Fox.

By pricing the shares 20p higher than the takeover offer at £10.95, the market is effectively saying it believes Fox will have to come back with a higher takeover price.

WHY COULD SKY GET A BETTER DEAL?

Investment bank UBS believes the analyst community, as represented by consensus estimates, were factoring in a 20% to 30% increase in the cost of the football rights for Sky.

The broadcaster has now struck a deal to pay £1.193bn per year for the rights, which works out as 16% cheaper per game versus the current agreement.

The reduction in costs effectively means analysts will have to upgrade their earnings forecasts.

Stronger earnings forecasts could lead to shareholders seeking a higher offer price from Fox.

‘Consensus assumes £1.7bn of earnings before interest, tax and amortisation (EBITA) for Sky in its 2020 financial year (the first year of the new Premier League rights cycle),’ says UBS.

‘Theoretically,  consensus  should  move  to  £2.2bn  of  EBITA  based  on  the  rights  outcome,  but  we  believe  Sky  will  likely  use  some  of  this  headroom  to  invest  more  in  original  programming.’

WHAT ABOUT DISNEY’S INVOLVEMENT?

Sky’s takeover deal is quite complicated thanks to Disney having struck a deal to buy assets from Fox including its current 39% stake in Sky.

The Competition and Markets Authority (CMA) is due to give its verdict by 14 June on whether Fox can buy the remaining 61% of Sky it doesn’t already own.

If the deal is approved by the CMA, then Fox would complete its acquisition and Sky shareholders would get the cash they’ve patiently expected – assuming they vote in favour of the deal. Fox would then transfer its full ownership of Sky to Disney.

However, if the CMA blocks the takeover, then Disney would only be left the 39% of Sky it is initially inheriting from Fox.

There have been reports that some Sky shareholders would want Disney to offer £13 per share for the rest of Sky in this circumstance.

WHAT ARE THE KEY DETAILS OF THE NEW RIGHTS AGREEMENT?

Sky has secured the rights to show 128 Premier League games a season, up from 126, and Saturday evening matches for the first time.

The company remains among the biggest sports coverage providers. It covers the English Football League, Scottish Football, England cricket, as well as exclusive coverage of Formula 1 from 2019 to 2024.

Investment bank Liberum argues BT (BT.A) has done ‘relatively poorly’ by picking up only Saturday lunchtime Premier League games and paying £295m per season for 32 games, 10 less than the current contract.

‘This will raise further questions about BT’s strategy in Media and could also provide Sky with a competitive advantage in attracting bundled Pay TV/bundled customers,’ comments Liberum.


Issue Date: 14 Feb 2018