Monday, 25 April 2011

BSKYB: week ahead and take-over musings

BSKYB @ 835p, -1.5p (-0.18%)

BSKYB also publishes its 3rd quarter results this week with expectations of a 15% jump in profits to £252m and an increase in subscriber numbers of up to 40,000.
The subscriber increase is down on last years comparative period 62,000 though, due mainly to the HD marketing drive that took place last year.
The investment bank Nomura takes this further suggesting that the company is on track to report a 25% increase in full year profits to £946m ( Sky on course for profits of nearly £1bn).

The company is also the target of a takeover by its majority shareholder News Corp. Very much a family affair, News Corp is run by Rupert Murdoch whilst BSKYB is chaired by his son James Murdoch.
In the past BSKYB has been encouraged by News Corp to spend strongly on marketing to build its customer base but it is speculated that should the takeover go ahead this marketing spend will be slashed effectively turning BSKYB into a cash cow.
Currently the board at BSKYB have encouraged a bid above above 800p but as financial results improve and shareholders see an opportunity various take-out prices north of 1200p are being bandied about. Although it should be noted that there is no opportunity of a bidding war and the sterling dollar exchange rate has gone against News Corp which leaves the $64,000 question "how much does Rupert Murdoch want SKY".

Using last years results the company had:
- £649m cash on its books
- Margins of 18.43%
- After tax profits of £878m
- Dividend cover of 1.6 times
- Return on Capital Employed of 70.78%
- Cashflow per share of 78.66p v 31.1p earning per share

The key for Murdoch is the balance between how much News Corp will fork out v.
- the payback period from the Sky dividend
- future earnings enhancements to News Corp from the dividend.

At 835p the company is valued at £14.636bn but News Corp already owns 39% which leaves £8.92bn of Sky which it doesn't currently own.
1200p a share is a 43% premium to 835p which would value the outstanding 61% stake at £12.756bn.
But, the sterling dollar exchange rate has gone against News Corp since its opportunistic offer of 700p per share in July of last year. The intervening period has seen the rate move from $1.5281 (average) to $1.6296 (average), a 6.6% deterioration to News Corp war chest.
In turn, applying this 6.6% to the £12.756bn valuation results in an potential actual cost to News Corp of £13.603bn (before finance and legal costs).

Not sure how this would work in terms of News Corp but if Sky was to make £1bn of profit per annum and this was taken by the parent company then it would take 13.6 years (excl. any finance or legal costs), for the investment to payback. 
But, it is likely to be earnings and cashflow enhancing almost immediately.

My consideration here is whether or not there is an opportunity to make an investment in BSKYB  in order to generate a profit on takeover but, at this stage in the process, it hinges on whether or not BSKYB is still at an attractive valuation should the takeover not come about.
It does seem likely to go ahead but at what price given no third party involvement. 
Should it not go ahead then there is still the opportunity to cut marketing spend and reap the cash cow benefits but this may be deemed ex growth by markets in the short term until growth numbers prove otherwise.
Still more to think on and I need to understand if there is an expiry date for News Corp to make an actual bid. Certainly it seems likely that if they don't bid in the short term then increasing profits in the short/medium term will only increase the premium required to take-out the 61% it doesn't own.
It might also be worthwhile for me to incorporate some kind of discounted cash flow model to understand what kind of investment Sky is going to turn out to be for News Corp. 
So still plenty to mulch around.

Article links: The week ahead: Cluster of big names will fill the short trading week Sky on course for profits of nearly £1bn 'will slash BSkyB marketing spend'

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