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Sky - A stronger start to the year

George Salmon | 18 December 2017 | A A A
Sky - A stronger start to the year

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In December last year, 21st Century Fox made a takeover approach and Sky's independent directors have reached an agreement on a price of £10.75 per share, to be paid in cash. This represents a 40% premium to the closing price on 6 December, the day before Fox's initial approach.

While the deal has not yet received regulatory approval, the acquisition is expected to complete in the first half of 2018. Sky will not pay a dividend in this year, but 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.

It is not expected that Disney's proposed acquisition of Fox will impact the deal.

Our view

The potential takeover from 21st Century Fox, which could see Rupert Murdoch re-take control of the business he launched in 1989, means recent results have, in the most part, been something of a sideshow for investors.

Fox's bid won't have come as a surprise to many. Even after taking Sky public, Fox has retained a significant interest, and it had described its 39.1% stake as 'not a natural end position'. The group was forced to pull the plug on a bid in 2011 amid public outcry over the involvement of News Corp, then Fox's parent, in the phone-hacking scandal.

The deal still has hurdles to clear, but conditions are less hostile this time around. Politicians have bigger things on their minds, namely Brexit and an impending election, while the Sky board support the deal.

The timing of the move is also attractive to Fox. 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 last year. The weaker pound also means the deal is set to cost Fox significantly less than it would have done pre-EU referendum.

First quarter results were better, but recent results have been mixed. Germany & Austria in particular have put in a good performance, but it's not all been plain sailing, with Sky Italia struggling to grow rapidly. A strained consumer environment means the near term outlook is reasonably tough.

Football rights costs have stepped up, and Sky is having to dig deep to find the extra cash. Cost savings are being found, but the group has also needed to firm up its stance on pricing. Higher subscription fees have coincided with higher rates of churn, meaning customer retention is weaker than it has been for some time. Sky will hope the more flexible sports offering and its new loyalty scheme can help steady the ship.

First Quarter Trading Update

Group like-for-like revenues increased by 5% to £3.3bn in the period, with good growth across all territories despite headwinds from a decline in the UK advertising market and pressure on consumer spending across Europe. The shares were little moved on the news.

With operating costs held flat, EBITDA, rose 11% to £582m. This includes start-up losses of £24m around Sky Mobile and Sky España. Sky says both of these ventures have been well-received by customers thus far.

While the customer base in Italy remained flat, Germany & Austria added 90,000 new subscribers, with the UK & Ireland growing by 70,000. This growth meant total new subscribers rose by 51% more than Q1 last year. Much of the marketing was built around Game of Thrones 7, which has become the most watched series ever on Sky.

Looking ahead, Sky expects to launch Sky Soundbox an all-in-one sound system, in the UK in the coming months, with Sky Q set to get off the ground in Italy, Germany & Austria. Following in the footsteps of similar schemes in the UK, Ireland and Italy, Sky is to roll out a new loyalty scheme in Germany & Austria later in the year.

Jeremy Darroch, Sky CEO said "despite the uncertainty in the broader consumer environment, we remain on track with our plans and enter the busy Q2 trading period focused on delivering our clear strategy for growth."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.

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