Wednesday, 13 June 2012

BSkyB and BT to pay £3bn for Premier League rights

BSkyB @ 695.5p, +9.5p (+1.38%)
BT @ 209.10p, -2.5p (-1.18%)

Wow! £3bn for 3 seasons of Premier League television rights.
That's one helluva price for a season ticket!
Of course, its BSkyB, that has once again secured the rights to the English Premier League at a cost of £760m per annum for the 3 seasons starting August 2013.
But surprisingly to me BT has muscled in to take the remaining games which raises a total of £3.018bn for the Premier League a massive 71% increase on the current deal which raised £1.764bn.

I'm not sure which is more surprising, the size of the deal, BT, or the fact that Disney controlled ESPN is no longer involved.

I had recently been taking another look at BSkyB for its cash cow qualities but got concerned that ESPN might have a bigger say in the Sky's jewel in the crown Premier League rights. Particularly if financial backing from Disney were to come into play.

Certainly along these lines, my view is growing that Sky could potentially come under pressure as technology moves forward with internet based "Smart" TV's potentially changing the game along with content providers iPlayer, Netflix, LoveFilm (Amazon) etc.
I posted recently about Apple, which itself is a dark horse with the long suggested iTV (catchy name or what), but made a comment about content coupled with technology as the king making strategy.

Well, with their movie content, the likes of Netflix and Love Film have potential to gain followers in high speed broadband areas so it seemed crucial to me that Sky retains its dominant position as the provider of Premier League games.

Its certainly come at a price though and its worth trying to understand the impact on Sky although I would expect the company to ratchet up the price of its sports subscription somehow.
In 2011:
- revenues of £6.597 bn (2010: £5.709 bn)
- £810m of profits after tax and attributable to shareholders (2010: £878m)

Click to enlarge, close to return.

- cash on the balance sheet amounted to £921m (2010: £649m)
- the 2010 Final and 2011 Interim dividend combined to total £353m (2010: £314m)

Click to enlarge, close to return.

Revenues up but profits down. But cash balances up as well as dividend payments being increased.
I can see that operating expense increased in 2011 to £5.524bn from £4.865bn the previous year which helps to explain why profits fell in spite of increased sales but the cash increase is then slightly surprising.

Ah but I see that there was a litigation settlement from EDS in 2010 which boosted profits by £269m. There was also a chunky repayment of debt in 2010, £495m, contributed to a reduction in 2010 cash balances.

So profits were boosted in 2010 providing a tough, and not quite fair comparable for 2011 and, cash balances were disproportionately impacted in 2010 again providing a not quite straight forward comparable for 2011.

Anyway back to the gist. I have never really thought where and how TV rights sit in the accounts of Sky but here it is in their own words under Inventories:

"Payments made upon receipt of commissioned and acquired programming, but in advance of the legal right to broadcast the programmes, are treated as prepayments. The cost of television programme inventories is recognised in the operating expense line of the income statement, primarily as described below:

Sports – 100% of the cost is recognised in the income statement on the first broadcast or, where the rights are for multiple seasons or competitions, such rights are principally recognised on a straight-line basis across the seasons or competitions"

So I'm open to correction but read that as an asset of inventory item on the balance sheet (unless paid for upfront), then expensed (proportionately as broadcast) as an Operating
expense through the P & L over the course of the licensed period. In this case 3 seasons.

Anyway, £760m per annum is almost equivalent to 2011 net profits of £810m.
And, assuming that £760m is a 71% increase on last time that means that approximately £444m is currently contributing to operating expenses, which therefore leaves £314m of additional expense from Aug 2013.

So assuming no changes to anything else (unrealistic I know) that would consume £314m of what is currently profit.

This then leaves £496m of net profit attributable to shareholders from which the company can continue to pay the current dividend which last year cost £353m.

Not quite as straightforward as that though as profit and cashflow are 2 different things and as the cash increase last year after dividends has been paid was just £203m then an additional expense of £314m could turn that negative meaning that cash balances could deteriorate.

However, I said unrealistically earlier. Realistically, I would expect subscription costs to increase to maintain profit margins and the dividend now that the News Corp bid looks dead in the water. Shareholders now want a better return and I presume that News Corp does also (even if it can't get its hands on all of it).

Interesting that the strategic investment in ITV sits on the balance sheets as an "Available for sale investment". Which having been purchased for a cost of £946m, and following a minor disposal, now has a net impairment cost value of £215m.

Would BSkyB attempt to sell it as some point to raise funds, who knows.

I guess at the end of the day I can see the thinking that has seen BSkyB pay so much for the rights but I also think they had to make sure they kept them.
And, whilst the headline grabbing £3bn is a bit gobsmacking it does split down to £2.2bn for Sky spread over 3 years.

Similarly a 71% increase is also significant and adds an estimated £314m of operating expense but I can just about see how it is manageable.
The big question is how much of that additional cost can be passed on to subscribers and advertisers

That's now the £314m question!

As for BT's surprising £24
6m per annum investment, the company said:

"it would launch a new football-focused channel to carry the games.
It will offer new interactive features when supplied over BT's fibre network and we will look to distribute it on other platforms," the telecoms firm said"
( Premier League rights sold to BT and BSkyB for £3b).

Related article links:

No comments:

Post a Comment