BSkyB mood up, but stock down
Shares in BSkyB tumbled 4.3% on Feb 9 as the London stock market digested the full impact of Friday’s spectacular premiership soccer TV rights win. Cazenove, for example, downgraded the broadcaster to "in-line", saying its investment plans, dollar strength (which means its bought-in series and films costs its more) and recent soccer rights auction all leads to pressure on profits forecasts over the next few years. But there was some good news.
“The higher content costs are an incremental £80 million per year on our forecasts, if we assume BSkyB can generate an additional £10 million per year in advertising, this would translate to around 8% cut to our 2011 EPS forecasts," said broker RBS in a note to its clients. "Overall, this is positive news from a competitive stand point, extending Sky's grip on football content ... but it's more [financial] downgrades.”
That sentiment was somewhat echoed by Morgan Stanley, although the bank refused to downgrade forecasts for Sky, instead arguing that despite the extra 24% increase in overall costs for the English premiership (taking Sky’s total bill to an impressive £1.623bn) it will “easily offset that additional cost through lower fees paid to Setanta (for pubs and clubs distribution) and through an uplift to advertising (higher audiences due to more games) on the Sky Sports channels. This means that at the very least, there is no need to downgrade our estimates. Furthermore, Sky could choose to reduce spend on other sports, as it has done in the past, now that it has the additional matches.”
Indeed, Morgan Stanley analysts go so far as to say that there’s even more upside potential in the soccer deal. “Higher retail prices would feed through to wholesale prices, and volumes could rise, given that Virgin XL customers (who today get Monday night matches free) will have to pay for Sky Sports in order to get those matches from August 2010e. These revenue-driven upgrades may be more complicated than the simple cost reduction for which the market was hoping, but they are likely nonetheless,” said the bank’s note.
Morgan Stanley also suggest another intriguing thought, that while some aspects of the media certainly hyped up the presence of Disney-ESPN in the bidding market, it would seem that at the end of the day their cheque-book (or should it be check-book) wasn’t adequately funded. “The result of this auction suggests the Disney-backed business presents no threat to BSkyB for at least the next 4-5 years. Similarly, we think competition from Setanta will be materially weakened by the loss of the more attractive rights package,” says the bank.