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Sky - Half year results

George Salmon | 25 January 2018 | A A A
Sky - Half year results

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In December 2016, 21st Century Fox made a takeover approach and Sky's independent directors 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 the day before Fox's initial approach.

On 23 January 2018, the Competition and Mergers Authority raised concerns around media plurality, saying a takeover of Sky by Fox would mean the Murdoch family would have 'too much control over news providers in the UK'. However, possible solutions, including insulating Sky News from the Murdochs, or splitting it from Sky were suggested.

Should the deal fall through, a break fee of £200m will be paid to Sky.

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Our View

21st Century Fox's potential takeover of Sky, which would see Rupert Murdoch resume 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 shouldn't be a surprise. Even after taking Sky public, Fox retained a significant interest, and 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, the CMA has reservations around Murdoch's level of influence, but conditions are less hostile this time around. It's worth noting Disney is in the process of buying Fox itself and if this deal goes ahead, Murdoch will be stepping back from Sky News anyway. That should make a compromise easier.

The timing of the move is attractive to Fox. Despite a chunky 40% premium, the £10.75 offer price is still less than what the shares changed hands for at the start of 2016. The weaker pound also means the deal is set to cost Fox less than it would have done pre-EU referendum.

However, the wrangling over Sky's future ownership won't be resolved before the next Premier League rights auction, due in early February. Last time out Sky agreed to pay £4.2bn, and while it found some savings, the sharp increase meant it had to firm up its stance on pricing to offset the extra costs. Higher subscription fees have coincided with higher rates of customer attrition. Although churn improved slightly at the half year, it's still ahead of historic levels.

With deep-pocketed rivals like Amazon rumoured to be interested this time, whoever ends up in control might find their first task is to offset another cost increase.

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Half year results

Group revenue rose 5% to £6.7bn, with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 10% to £1.1bn. This increase came as better operating efficiency helped offset the cost of rolling out new services like Sky mobile and Sky Q, plus a £72m increase in costs from German Bundesliga rights.

Geographically, Sky saw revenues rise in every region. Growth in the UK & Ireland was 4%, taking half year revenues to £4.4bn. Revenue in Germany & Austria rose 8% to £1bn, with Sky Italia delivering £1.3bn, a 4% rise.

Retail customer numbers rose by 284,000 to 22.9m, with increases in the UK & Ireland and Germany & Austria more than offsetting a slight decline in Italy. Customer churn in the UK was 11.2%, down from 11.6% last year. However, a high number of expiring contracts saw churn in Germany & Austria increase to 14.2%, with Italy remaining stable at 9.6%.

During the half, Sky announced a wholesale agreement with BT. This will give Sky customers the option of adding BT Sport to their TV package from early 2019.

Sky declared an interim dividend of 13.06p per share. This follows the 10p due to those holding the shares on 12 January, as a result of the Fox deal not getting over the line in 2017.

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