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Sky - Half year results

George Salmon | 26 January 2017 | A A A
Sky - Half year results

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Sky's half year revenues are up 6% at constant currency to £6.4bn, with over 500,000 customers joining across the UK, Germany, Austria and Italy. Operating profit dropped 9% to £679m after the step up in Premier League costs, which rose by £314m in the half.

In the UK and Ireland, revenues increased 5% to £4.3bn, however customer churn (the percentage of customers leaving Sky in a rolling 12 month period) of 11.6% remains higher than planned. The group will be implementing a loyalty programme to try to reduce this figure.

After what the group described as a slow start to the season, Sky Sports viewing figures are improving. Elsewhere, downloads of the Sky Kids app rose 40% and Sky Store enjoyed record weekly revenues over Christmas.

In Germany & Austria, the group is pleased with take-up of its new Sky+Pro box, and had a good response to the launch of both Sky 1 for pay TV customers and Sky Sports News on free-to-air TV. In Italy, viewing figures of Sky Cinema have improved after November's relaunch, while the targeted advertising service Adsmart, is now up and running.

Net debt now stands at £7.3bn, and has increased to 3.1 times EBITDA (earnings before interest tax, depreciation and amortisation). The increase is attributed to the timing of increased Premier League rights payments and an increase in the sterling value of the group's euro-denominated debt.

Takeover offer from 21st Century Fox (15 December 2016):

After news of a potential offer broke on 9 December, 21st Century Fox has now made a firm offer for Sky. Sky's independent directors have reached an agreement with Fox on a cash offer price of £10.75 per share. This represents a 40% premium to the closing price on 6th December.

While the deal has not yet received regulatory approval, Fox expects the acquisition to complete during 2017. Should the deal not complete until after the end of the year, Sky shareholders will be entitled to receive a special dividend of 10p per share, payable in 2018. Should the deal fall through, a break fee of £200m will be paid to Sky.

Sky will not pay a dividend in 2017.

Our View

The potential deal for Rupert Murdoch, the man behind 21st Century Fox's bid, to re-take control of the business he launched in 1989 won't come as a surprise to many. Even after taking Sky public, he has retained a significant interest, and Fox has described its 39.1% stake as 'not a natural end position'.

He's bid for the group recently too. In 2011, before Fox was split out of News Corporation, Murdoch was forced to pull the plug on a News Corp bid for Sky amid public outcry over the phone-hacking scandal. However, while any deal will still have to clear some hurdles, conditions this time are not as hostile, and Fox has secured Sky directors' approval for its offer price.

Sky offers Fox geographic diversification away from the stressed US TV market. In a brief statement, the group added that the deal would "bring together 21st Century Fox's global content business with Sky's world-class direct-to-consumer capabilities".

The timing of the move is also attractive to Fox, however. Despite the offer price being at a chunky 40% premium, £10.75 is still less than what the shares changed hands for at the start of the year. In fact, the weaker pound means the deal is set to cost Fox significantly less than it would have done pre-Brexit.

Should the deal go through, it would mark the second takeover of a FTSE 100 company to be announced since the referendum, after Softbank's £24bn takeover of ARM Holdings. Despite the new Prime Minister being notably less friendly towards foreign takeovers than her predecessor, weak sterling means we are not ruling out the prospect of there being more to come too.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.