The rationale behind ‘Sky Europe’: Why BSkyB aims to acquire Sky Deutschland and Sky Italia

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    International cricket, currently showing on Sky and NOW TV in the UK.

    The BSkyB deal to buy the whole of Sky Italia and a large part of Sky Deutschland from 21st Century Fox, creating a multi-territory satellite operator covering 20 million customer homes, is a response to the changing dynamics in the television market, influenced by OTT, in which internationalization makes sense. That is the view of Guy Bisson, Research Director, Television at IHS Technology, who has highlighted the potential for an international standalone OTT service from the enlarged company that leverages its superior access to recent content, resulting in an international ‘Pay TV Lite’ offering that may later take on a wider remit.

    “With OTT services like Netflix and Amazon easily porting their business model across international borders, the immediate threat to traditional operators is the ability of OTT to rapidly build international scale. Although both Sky Deutschland and Sky Italia already have stand-alone OTT services, a core plank of the strategy for the new Sky entity will be the roll-out of a unified stand-alone OTT offering across the markets, modelled on the UK’s NOW TV,” Bisson declares. “This will give Sky a strong defensive position against OTT entrants.”

    Looking at the immediate consequences of the deal, the rationale given by BSkyB is the growth potential for Pay TV and triple-play services and operating synergies (especially between the UK and Italian businesses). The company points out that the new Sky will be the No.1 Pay TV provider in three of Europe’s four largest markets. “The enlarged business will benefit from a significantly expanded opportunity for long-term growth and value creation, with 97 million addressable households. Of these households, around 66 million have yet to take Pay TV and there is significant headroom to sell additional products to and launch new services for customers,” BSkyB declared today.

    BSkyB has the track record to exploit this potential. As it points out, over the last five years in the UK and Ireland, the company more than doubled its paid-for subscription product base and increased revenues by 43%. “That is the result of a well-established strategy of broad-based growth,” the company says.

    Savings are expected in programme rights acquisition, live events production, commissioning, back-office IT systems, rationalization of suppliers and, in the longer-term, rationalization in product and set-top box development. This last point could become significant, given the precedent that Liberty Global has set for building a next-generation platform (Horizon) that is now being shared across multiple territories. Bisson says we should not view the BSkyB move as any kind of response to Liberty Global, however. “Sky does not see the company as a direct threat,” he declares.

    He adds: “The jewel in this deal in terms of short-term growth is clearly Sky Deutschland, which has seen a dramatic turnaround in its fortunes in the past few years and continues to grow strongly. By contrast, Italy has seen a downturn in Pay TV uptake and Sky Italia has been fighting customer losses. The longer-term opportunity to roll-out triple-play in this market is therefore the key. The cable industry has shown over the past decade that significant revenue and ARPU growth can be achieved even with a declining customer base. Coupled with the scale benefits and the fact that the deal is expected to be strongly cash accretive within two years, this a powerful move.”

    Bisson points to Fastweb as a potential acquisition given an existing relationship and the fact that this company recently pulled out of IPTV to concentrate on phone and Internet. “There would be no business overlap and it would be the best way to re-ignite growth in that market through triple-play as well as give Sky an advantage over Mediaset.” IHS Technology believes the initial focus of the international triple-play strategy will be Italy because there is no cable competition and only limited IPTV development.

    In terms of the numbers, BSkyB has agreed to acquire 21st Century Fox’s 100% stake in Sky Italia in return for £2.07 billion cash and its 21% stake in National Geographic Channel International, which is worth a further £382 million. BSkyB is buying 21st Century Fox’s 57.4% interest in Sky Deutschland for £2.9 billion cash. BSkyB is launching a voluntary cash offer to Sky Deutschland’s minority shareholders at EURO 6.75 per share. Group revenues will increase from £7.6 billion for the standalone BSkyB to £11.2 billion. The customer base grows from 11.5 million (BSkyB) to 20 million. Both transactions are subject to regulatory and independent shareholder approval.

    BSkyB said in a statement: “The enlarged group will be better positioned to take advantage of the enhanced growth opportunity as a result of the ability to share expertise across the wider business. BSkyB, Sky Italia and Sky Deutschland are complementary businesses with a common brand, operating similar business models and offering similar products to customers. Bringing them together will enable the application of best-in-class capabilities in areas such as content, innovation and service delivery, to the benefit of all three businesses and their customers.”

    Jeremy Darroch, BSkyB’s Chief Executive, comments: “This transaction will create a world-class, multinational Pay TV business with enhanced headroom for growth and immediate benefits of scale. The three Sky businesses are leaders in their home markets and will be even stronger together. By creating the new Sky, we will be able to use our collective strengths and expertise to serve customers better, grow faster and enhance returns.”

    Bisson says he does not expect more satellite operators to be acquired in the short-term but does not rule out more deals in future. He also notes the possibility that OTT could eventually be used as the platform for any continued international expansion.

    In an analysis of the deal, IHS says production cost savings can be made, particularly around coverage of major sporting events that today are filmed by three separate crews. Further, common channel brands can be rolled out simultaneously and original programming can be funded and used across borders. “The three platforms are already co-producing a 10-part drama series called Diabolik,” the research and consulting firms notes. “The enlarged Sky Europe will have a combined annual programme spend of £4.6 billion and revenue of £11.7 billion; more than 50% greater than Sky UK alone.”

    There will be no additional advantage in premium sports rights or first window rights to Hollywood movies, however. “These rights are typically awarded on a territory-by-territory basis and Sky faces strong competition from companies like BT, Mediaset and Deutsche Telekom,” Bisson adds.

    However, the extended company footprint could be leveraged in a number of ways when it comes to programming: When negotiating rights for competitions that are not in the top tier of premium events in each country and where rights holders may be open to a multi-territory deal; If Sky was to position itself as a partner for sport rights holders, creating the coverage and handling the distribution of the event worldwide; When building the brand of sports by giving them greater TV exposure.


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