BSkyB shares lose £760m!

British Sky Broadcasting Group @ 650.5p, -45p (-6.47%)

Now thats interesting.
After yesterday evenings Premier League rights announcement (BSkyB and BT to pay £3bn for Premier League rights), BSkyB shares have been "adjusted" by 45p this morning.

When I first checked it this morning the shares were down 45p which, with roughly 1685.44m shares in issue, equates to £758.5m off the company's market capitalisation.
And, funnily enough £758.5m equates to the £760m per annum that Sky has agreed to fork out for the Premier League rights (BSkyB and BT to pay £3bn for Premier League rights).

But £760m is for the season starting Aug 2013 unless the company spent that amount yesterday I don't really understand why its been top sliced off the value of the company this morning.

Alternatively, if it doesn't start to be expensed until next year then there must have been some "estimate" of licensing costs in analysts forecasts given BSkyB's traditional position as the go to provider of Premier League football broadcasting in the UK and would therefore participate in any future auction.

That being the case the continued attraction of the Premier League would suggest an additional premium on the approximate £444m (BSkyB and BT to pay £3bn for Premier League rights) that is being expensed currently based upon the last licensing deal.
Which therefore conflicts with £760m been lopped off the price rather than a figure lower than £314m (£760m minus £444m already being expensed) which assumes no increases to subscriptions/advertising to compensate.

Now it also looks strangely like BSkyB's shares were suspended (or something like), as the share's don't look to have come live for trading until 8.05am, with the price already adjusted.

Click to enlarge, close to return. 
(Chart courtesy of Digitallook).

Anyway, even if the first year's cost has come out upfront (to show as a pre-payment) and the pattern is a continuation of previous practice then there will be benefit next year when the old deal drops off the P & L to the tune of £444m and the last year of the deal which, through a staggered upfront payment, would have been already paid for.
The company's cashflow might take a hit in the period but will surely average out over the longer 3/4 year span of the current/new deal.

Doesn't make too much sense to me then and it still seems more likely that the £760m "should" be expensed during the year of broadcast, either way there will a level at which the 2 deals balance and average out at which point the new deal is an additional cost to the BSkyB of £314m not £760m.
So that could and should mean that only £314m should have come off the market capitalisation (the additional incremental expense) which with 1685.44m shares in issues equates to 18.6p.

As 45p has come off the share price then that is a possible over-reaction of 26.4p
And 26.4p would add 4% to the 650.5p share price taking it back to 676.9p.

Is the share price over sold on that basis giving an additional 4% opportunity in addition to the company's underlying prospects and any subscription/advertising increases.

My naggng concern is that with the strange "suspension" type gap on the chart that some kind of formal accounting exercise may have taken place.

However, as mentioned, even if this is a hit to cashflow in this period, I can't see it doing anything other than averaging out over the newly extended period of the deal. 
And, that would also assume that there is no "value" to the £760m per annum license.

Looks like BSkyB is one to keep an eye then.

Earlier post:
- BSkyB and BT to pay £3bn for Premier League rights

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 £246m 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" (http://www.bbc.co.uk: Premier League rights sold to BT and BSkyB for £3b).

Related article links:

- http://www.dailymail.co.uk: BT barge in on Sky's deal as Premier League TV rights sell for £3BILLION

- http://corporate.sky.com: Sky remains the home of Premier League Football
- http://corporate.sky.com: Annual Report 2011
- http://www.bbc.co.uk: Premier League rights sold to BT and BSkyB for £3b


Earlier posts:
- BSKYB: week ahead and take-over musings

Investment thoughts: Is the Sky falling in on BSkyB!

BSkyB @ 635.50p, -22.50p (-3.42%).

So James Murdoch has stood down as Chairman of BSkyB (but retains a non-executive position on the board) in a move that may help to deflect some of the negativity linked to News Corp, (through the long running phone and email hacking scandal that led to the demise of The News of the World), from spreading to BSkyB.

Unfortunately, it appears that Sky News has created its own news-worthy headline with media reports that the company "was a heavy faller on reports that its Sky News unit had been involved in hacking the e-mails of a man accused of faking his own death. Sky said it believed it was in the "public's interest"."

I find the last part of that statement, where Sky News justifies its actions as being in the public's interest, particularly intriguing when despite arguably also being in the public's interest (given the Leveson Inquiry into media ethics), it has taken this long for this admission to come out.
I can only think that the story was about to break! 

It certainly seems to be a widening circle of questionable investigative methods but it remains to be seen if Sky can put up a sufficient defensive firewall to maintain its respected position of neutrality.

Even more important to Sky's fortunes is the need to ensure that nothing threatens its ability to bid for and retain the rights to Premier League football particularly at a time when the broadcasting industry has opened up a new front of competition with the entry of Netflix into the UK and the increasing viability of Internet TV.

It has home court advantage, is the incumbent pay TV operator in the UK, and has deep pockets but, in my view at least, the company's unique selling point and jewel in the crown continues to be live Premier League football.

So if the company can satisfactorily defend its reputation (James Murdoch's stepping down helps, even more so if the episode goes with him), BSkyB should be able to protect its position as the major source of live Premier League football in this country which could mean that the company, on 13 times forecast earnings and a yield of 3.9%, might yet present a brave but compelling investment opportunity.

Related articles:

- http://www.sharecast.com: London close: Stocks rally into long weekend

- http://www.telegraph.co.uk: BSkyB investors sample the bitter taste of a Murdoch discount again

Earlier posts:
- BSkyB: Where to from here?
- BSKYB: week ahead and take-over musings
- Smoke and mirrors: BSkyB, and The News of the World!
 - Adventures in Equities: Wed 22 Dec: National Grid opening higher

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 (www.thisismoney.co.uk: 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:
- thescotsman.scotsman.com: The week ahead: Cluster of big names will fill the short trading week
- www.thisismoney.co.uk: Sky on course for profits of nearly £1bn
- www.thisismoney.co.uk:Murdoch 'will slash BSkyB marketing spend'