25th Jul 2014 14:06
LONDON (Alliance News) - British Sky Broadcasting Group PLC Friday said it will acquire 21st Century Fox Inc's holdings in Sky Italia and Sky Deutschland for a total of GBP4.9 billion in cash, plus BSkyB's 21% stake in the National Geographic Channel, to form a new enlarged business, as it also reported a fall in pretax profit in the year to the end of June.
The much-anticipated acquisition will consist of GBP2.07 billion in cash and the transfer of BSkyB's National Geographic stake, valued at GBP382 million, for Fox's 100% ownership of Sky Italia, plus GBP2.9 billion in cash for Fox's 57.4% stake in Sky Deutschland. BSkyB will also make an offer to the minority shareholders in Sky Deutschland at EUR6.75 per share.
Depending on the number of Sky Deutschland minority shareholders who take up the offer, the total cash consideration may be up to GBP7.0 million overall.
To part-fund the acquisitions, BSkyB placed 156.1 million shares, representing around 9.99% of its existing share capital. The shares were placed at 870 pence each, BSkyB said Friday afternoon, raising a total of GBP1.36 billion. Fox, which has a 39.14% interest in BSkyB, has subscribed for 61.1 million shares at GBP531.6 million to maintain its existing shareholding in the company.
The placing was conducting by Barclays Bank PLC and Morgan Stanley Securities Ltd.
Shares in BSkyB were trading down 5.1% at 878.00 pence Friday afternoon, the biggest faller in the FTSE 100.
Last week, BSkyB had sold a 6.4% interest in ITV to John Malone's Liberty Global Inc for GBP481 million in cash.
BSkyB said that the acquisitions are expected to be at least neutral to earnings per share in the second full financial year of ownership, and will strongly add to earnings thereafter. It expects to be able to realise GBP200 million in run-rate cash synergies by the end of the second full financial year after completion, with further synergies expected in subsequent periods.
BSkyB expects to make a majority of these synergies in its UK and Italian business, as they are larger and have more similar direct-to-home operations. It expects the cost to achieve these synergies will be around GBP150 million.
"The three Sky businesses are leaders in their home markets and will be even stronger together. By creating the new Sky, we will be able to use our collective strengths and expertise to serve customers better, grow faster and enhance returns," Chief Executive Jeremy Darroch said in a statement.
Broker Numis said that it could see the "strategic and financial rationale for the combination" with Sky Italia and Sky Deutschland and said it was supportive of the transaction. It noted that it had not expected the 9.99% placing, but said this "clearly this gives considerable headroom should Sky Deutschland minority shareholders accept the offer."
Jefferies analyst Sara-Louise Boyes also cited the placing as a surprise "given recent discussion," but said that it will leave BSkyB's balance sheet in a strong position after the deal.
Boyes noted that, were the Sky Deutschland minority shareholders to tender their holdings, the leverage of around four times might still constrain BSkyB's flexibility somewhat going into the Premier League rights auction, which is likely to occur in the first quarter of 2015. Jefferies retained its Hold rating on the stock.
Research Director of Television at IHS Technology Guy Bisson said the "jewel" in the deal in terms of short-term growth is Sky Deutschland which has seen a "dramatic turnaround in its fortunes in the past few years." Sky Italia, on the other hand, has been fighting customer losses, Bisson said.
Bisson noted that over-the-top content providers, meaning media distributed over the internet, such as Netflix Inc and Amazon Inc are able to easily replicate their business models across international borders, meaning their ability to rapidly build international scale is an immediate threat to traditional operators.
Although Sky Italia and Sky Deutschland already have stand alone over-the-top services, "a core plank of the strategy for the new Sky entity will be roll-out of a unified stand-alone OTT offering across the markets, modelled on the UK's Now TV," Bisson said.
The acquisition will lend more fuel to speculation that Rupert Murdoch, who is Chief Executive and co-Chairman of Fox, and also founded BSkyB, will pursue his bid for US media giant Time Warner Inc. Time Warner previously rejected a USD92 billion bid from Fox, and the funds from the sale of the European assets could be used to bolster a further bid.
Meanwhile, BSkyB also released its results for the recent financial year. It proposed a total dividend of 32.0 pence for the year ended June 30, up from 30.0 pence in the previous year.
BSkyB posted a pretax profit of GBP1.08 billion for the financial year, down from GBP1.26 billion in the previous year, as revenue rose to GBP7.63 billion from GBP7.24 billion.
Revenue was adjusted to to exclude revenue from BSkyB's discontinued retailing of the ESPN channel, which amounted to around GBP6 million, but includes revenue from broadband customers acquired from Telefónica O2 UK.
Revenue figures slightly beat consensus forecasts; analysts expected BSkyB to post revenue of GBP7.61 billion.
Despite the revenue increase, profit was hampered by a step-up in Premier League costs and continued investment into BSkyB's connected services.
The company posted an exceptional cost of GBP99 million during the year, relating to the costs of integrating the O2 business, its corporate efficiency programme, and ongoing amortisation of acquired intangibles, although this was partly offset by a net gain from the termination of an escrow agreement with a wholesale customer.
Under the new three-year Premier League deal BSkyB will pay a flat amount of GBP760 million in licensing fees per year for this year and each of the two subsequent years, an increase of GBP220 million per year compared to the previous rate.
Concerns linger over the future of broadcasting rights for the Premier League, as BSkyB now faces competition from BT Group PLC. BT launched its new BT Sport service last August after it won the rights to show some Premier League matches, and subsequently won exclusive rights to show Champions League and Europa Cup football matches in the UK for three season for EUR1.08 billion in total, starting from the 2015/16 season.
BT's entry into the sports market has raised concerns about an inflation of rights costs going forward as BT has demonstrated that it is willing to pay big for exclusive rights.
Average revenue per user rose to GBP576 from GBP569 in the previous year, and the average number of paid-for products per customer rose to 3.0 from 2.8. At the end of the year, 37% of its customers had taken up television, broadband and telephony, it said, up 2% from the previous year.
The company has focused heavily on its connected television services during the last year, and said it connected three million Sky+HD boxed to broadband during the year, which took its base of 'connected homes' to 5.7 million homes, and over 50% of all of its Sky TV customers.
Retail subscription revenue rose 7%, due to strong product and customer growth and due to price rises in the year. BSkyB's commercial business saw advertising revenue up 7%, boosted by a first-time contribution from its targeted advertising service AdSmart, and wholesale revenue up 3% as renewed carriage agreements and price increases were partly offset by lower customer volumes.
Other revenue was up 10% due to a strong performance from Sky Bet.
The company said that it closed the year with 11.5 million retail customers, up 342,000 over the year. Within this, it added 264,000 customers in television.
BSkyB added 3.1 million new paid-for-products during the year, up 23% on the previous year. The company added 341,000 net new broadband additions, including 50,000 in the fourth quarter.
BSkyB said its investment in original British productions has continued to deliver good results, citing its co-production with US cable network Showtime 'Penny Dreadful.' In acquired content, the fourth series of US cable company's HBO's 'Game of Thrones' saw average viewing up 60% from the third series.
"Looking ahead, we see a broader opportunity for growth than ever before as we bring our core products to more customers, and open up new revenue opportunities. After a successful year of investment, we are well placed to exploit these opportunities and continue to deliver growth and returns for shareholders," Darroch said in a statement.
By Hana Stewart-Smith; [email protected]; @HanaSSAllNews
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