Big Australian shareholders such as Perpetual and the Commonwealth bank will decide the fate of the $NZ3.4 billion merger between SKY TV and Vodafone New Zealand.
An independent expert’s report, released on Tuesday in NZ reveals that the top four shareholders control 37% of Sky’s capital and the top 20, 87%. In other words it is not strongly supported by small shareholders in Australia and NZ.
Given that level of control it is no wonder Sky executives were in Australia last week visiting big shareholders to explain why it is happening and to see support for the transaction.
The independent expert’s report from Grant Samuel’s reports makes it clear that it thinks Sky needs the telco services and products Vodafone can bring to the merger, along with its greater financial strength and size which will allow Sky to better compete with the new technologies and players.
And if there is no merger, Grant Samuel suggests Sky TV faces a slow decline as a stand alone company, especially over the next two to three years with the share price coming under pressure.
And in what is probably a world first, the rising threat from video streaming services such as Netflix has driven a Pay TV operator to merger with a telco.
The report makes it clear it the merger is justified because of the rapid growth in online streaming video of the type offered by Netflix and an expectation that Sky faces declining revenues and earnings if it remains independent.
In fact the proposed Sky-Vodafone merger is, like the proposed merger of the media assets of APN and Fairfax, something of a template for the rest of the world. Print media is under pressure from all things digital and regulators will be under pressure to allow mergers to preserve journalism in some form.
For the Pay TV sector, its growing pressure from digital services, and an absence of products to allow them to tap into the rapidly growing mobile sector which is placing them under pressure. Vodafone brings that and the rest of its telco offers to the deal and it is claimed will enable Sky TV to survive and even grow.
In Australia Foxtel is in a similar position – it doesn’t have any telco products to offer subscribers or help tap into the growing demand for mobile video Unlike its UK associate, Sky).
"The Proposed Transaction is expressly designed to address the deterioration in Sky TV’s strategic position. It will be transformational for Sky TV, creating a business unique in the New Zealand market place,” independent expert, Grant Samuel write in their report "… “In Grant Samuel’s view the strategic benefits of the Proposed Transaction are such that Sky TV shareholders will clearly be better off if the Proposed Transaction is implemented than if they continue as shareholders in a standalone Sky TV.”
And why? Grant Samuel points out that "The growing popularity of Over-the-Top (“OTT”) services delivering video on demand via high speed broadband internet has fundamentally changed the competitive position of pay television operators around the world. The effect for Sky TV has been increasing rates of subscriber churn and a flattening of revenue growth. "At the same time, heightened global competition for content has driven up programming costs, resulting in a projected fall in Sky TV’s earnings across the FY16 and FY17 financial years.”
"The number of Sky TV subscribers has been broadly flat since 2010, with penetration of New Zealand households remaining relatively constant at around 50%. From 30 June 2010 to 30 June 2014 Sky TV added approximately 50,000 subscribers, but the total number of subscribers fell in FY15. Sky TV is forecasting a decline in EBITDA in both FY16 and FY17”…”over time Sky TV will continue to be exposed to a variety of competitive threats, some of which may reflect technological development or industry dynamics not yet apparent.
"At worst, these might ultimately result in a material degradation of a standalone Sky TV’s ability to compete with other content providers and a significant fall in profitability. The Proposed Transaction should give the Combined Group the capacity, flexibility and resilience to respond to changing industry dynamics over the medium to longer term.”
"Sky TV has delivered strong shareholder returns over a number of years. However, as reflected in the recent sharp falls in its share price, Sky TV’s outlook is now more subdued. It faces a challenging subscriber growth environment (due in part to competition from OTT providers), higher content costs (particularly for live sport) and capital investment requirements associated with upgrading the functionality of its set top boxes.
"Its share price is exposed to the dual impacts of lower short- term earnings and lower valuation multiples for dedicated “pure play” pay television businesses. Nevertheless, Sky TV is a very successful and privileged business. It remains the leading source of premium television content in New Zealand with key sports properties in New Zealand secured for a number of years.
"There is little doubt that Sky TV could continue to operate profitably on a standalone basis over the medium term, although there is likely to be continued pressure on its profitability and, potentially, its share price.
"Without access to an integrated bundled product suite, Sky TV would become increasingly vulnerable to competition from telecommunications companies and other competitors. In a worst case, Sky TV could run the risk over the longer term of losing some of its key sports programming. The net effect could be a material drop in earnings and market value, as seen in other media sectors such as newspapers, other print media and free-to-air television,” Grant Samuel suggests.
However Grant Samuel cautions that the benefits from the massive merger will be slow in coming and not substantial for a while:
"Having regard to these factors, Grant Samuel believes that it is reasonable to expect that, over time, shares in the Combined Group will trade at meaningfully higher prices than shares in a standalone Sky TV. In the shorter term, the positive effect may be more modest, reflecting the longer dated timing of many of the synergies and likely investor caution regarding the recognition of revenue synergies before they have been delivered.
