Satellite broadcaster could be target for Fox or merger partner for Vodafone or 02
Could Rupert Murdoch take another tilt at satellite broadcaster BSkyB, where his Twenty-First Century Fox business still owns a 39% stake.
Or could BSkyB be a merger partner for Vodafone or O2? Those are the intriguing suggestions in a buy note on the broadcaster from UBS.
Murdoch's then News Corporation - before its split into two businesses - abandoned an £8bn bid for BSkyB in 2011 in the wake of the phone-hacking scandal. But analyst Polo Tang at UBS - one of BSkyB's financial advisors - said the company was a strategic asset:
Fox could revisit a merger of its European pay-TV assets to form Sky Europe. To overcome political resistance to a deal, BSkyB could remain listed but have its operating assets injected into Sky Europe in return for a majority stake in the larger entity.
Alternatively, the move to quad-play across Europe could also see BSkyB merge with either Vodafone UK or O2 UK. Such a deal could generate significant cost and revenue synergies that could be worth 248-264p per share. Alternatively, Sky Europe could merge with either Vodafone or Telefonica to produce a European quad-play operator.
UBS moved its rating from neutral to buy and its price target from 880p to 1100p, saying the outlook was positive:
We think trading at Sky (BSkyB) will remain resilient despite competition from the new BT Sport channel. We do not think the economics for BT Sport stack up and expect Sky to agree a wholesale deal with BT on sports at some point in 2014. We think investors have overlooked significant growth from new initiatives such as Adsmart, NowTV, Sky Go Extra and Entertainment Extra+ that could add £212m to profits by 2018.
Our 2014 earnings per share is unchanged, but 2015 earnings per share is lowered by 5% to reflect a possible broadband price war with BT in the near term. We also factor in a 45% hike in Premier League rights to £1.1bn per annum in 2017 (versus a 15% rise to £874m per annum before). However, the impact of this is more than offset by the upside from new initiatives and the effect of share buybacks (we now assume £500m per annum) – leading to 12% upgrades by 2016/17, rising to 29% in 2018.
Sky offers a balance of growth and cash returns, with 10.6% per annum earnings per share growth and 8.0% per annum total returns over the next three years.
BSkyB shares are currently 26p higher at 865.5p.
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