Sky Europe transforms BSkyB investment case

July 25, 2014

By Quentin Webb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

“British” Sky Broadcasting is no more. The group is buying sister Sky units in Germany and Italy for at least 4.9 billion pounds ($8.3 billion) in cash from Rupert Murdoch’s Twenty-First Century Fox. That transforms the investment case for the UK’s top pay-television group.

The price looks reasonable. BSkyB will pay 2.5 billion pounds for Fox’s wholly-owned Sky Italia: 2.1 billion in cash, and the rest via a stake in the National Geographic Channel. That’s about 10 times EBITDA, and lower than many analysts feared. In Germany, BSkyB is effectively paying the market price, buying Fox’s 57.4 percent stake in Sky Deutschland for 2.9 billion pounds, and making a mandatory tender offer to outside investors at the same level, of 6.75 euros a share.

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. So 200 million pounds of mostly cost-based annual synergies, which BSkyB reckons have a net present value of 2 billion pounds, is punchy. The deal logic is helped by cheap debt – BSkyB is borrowing at less than 4.5 percent. Fox is also keen for cash. It wants to keep rewarding shareholders, even as it pursues Time Warner.

But “Sky Europe” is more than a tidy-up. BSkyB 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 percent in Germany and 28 percent for Italy. The bigger group should be able to better hold its own against tech, telecoms and content giants.

There is a cost. Even though BSkyB is prudently raising equity, leverage will rocket from 0.7 times EBITDA to at least 2.9 times, or four times should it get all of SkyD. These are racy levels for a public European blue-chip, especially one that must write big cheques for sports rights. Cash returns will shrivel. A 500 million pound annual buyback has been halted, although dividends will keep rising.

The Sky drama just got more exciting. But it may also keep investors closer to the edge of their seats.

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