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Sky - Continued progress, but takeover potential still dominates

George Salmon | 19 April 2018 | A A A
Sky - Continued progress, but takeover potential still dominates

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Third quarter results from Sky show revenue for the nine months to 31 March 2018 rising 5% at constant currency, to £10.1bn.

With adjusted operating costs remaining flat, EBITDA (earnings before interest, tax, depreciation and amortisation) rose 10% to £1.7bn.

The shares were little moved on the news, with a potential takeover still the dominant story.

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Our View

With Sky on the receiving end of all-cash takeover bids, recent results have, in the most part, been something of a sideshow for investors.

21st Century Fox was the first to enter the fray. In December 2016 it came to an agreement that would see Rupert Murdoch resume control of the business he launched in 1989. The offer was £10.75 per share.

Fox's bid came as no real 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.

Fast forward to February 2018, and the deal still hadn't completed. Sky then secured a major coup, netting the rights to even more Premier League football over 2019-2022 at a reduced cost.

This pricked up a few ears, and spurred Comcast, the US based cable operator, into action. When announcing its intentions, it mooted a higher offer, of £12.50 per share. It's hard to see why Sky's independent directors would accept a £10.75 bid from Fox, then turn down this.

Any takeover has to get past shareholders and competition rules, but we can't imagine James Murdoch, son of Rupert and board member at both Fox and Sky, is too pleased a rival has gate-crashed Fox's party.

Fox returning with another offer shouldn't yet be discounted. A Sky-Fox tie up has always had concerns over media independence hanging over it, but the fact Fox is itself on the cusp of being bought by Disney seems to have eased regulatory worries.

Sky has been a strong performer over the years, having consistently led the way on content and innovation. With the Premier League rights under its belt for another 3 years, whoever lands the group will have secured an attractive asset.

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Third quarter trading details (at constant currency)

UK & Ireland revenues rose 4% to £6.7bn, driven by an extra 285,000 subscribers since the equivalent period last year and the continued growth of Sky Mobile and Sky Q. Good operating cost control ensured EBITDA rose 14% to £1.5bn.

In February, Sky signed a deal to extend its Premier League coverage for another 3 seasons from 2019. The rights were secured at cost of 16% less per game. This was followed by an agreement with Netflix and Spotify to make these services available on Sky packages. The Netflix deal also covers the European businesses.

In Germany & Austria, Sky has focused on upgrading its products and services, with numerous improvements, including the roll-out of the Sky Q service from May, targeted. This has seen customer acquisition costs and churn rates rise, with some lower value customers leaving.

While revenues rose 6% to £1.5bn, higher Bundesliga costs ensured EBITDA was £68m, down from £83m last year.

In Italy, revenues rose 5% to £2bn. October's price increase and strong increases in advertising and content more than offset the impact of a slight fall in customer numbers, which Sky attributes to the ongoing dispute with Telecom Italia.

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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.

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.