Despite 5 million DTH subs, BSkyB gets “disco fever”
In this case the term ‘Disco’ comes from investment bankers Morgan Stanley Dean Witter (MSDW) and its pre-Christmas report on BSkyB and its analysis of Sky’s two key sub- divisions DIStribution (Disco) and BROADcasting (Broadco). MSDW reckons that some 60 per cent of Sky’s EBITDA income currently comes not from the apparently all-important subscriber platform but from its channel production and aggregation business unit.
In other words while most of the world is encouraged to look at Sky’s headline-making DTH digital subscriber numbers as if this were all that mattered, Sky is relaxed in the certain knowledge that the bulk of its real success comes from its own channels and the exposure they gain across all platforms, including cable and ONdigital.
MSDW suggests that BSkyB’s current GBP11.00 share price (as of December 21) is stretched at current levels, and in a ‘Neutral’ rating says that its ‘fair value’ range for the next year is GBP8.24 (E13) a share, with the price not likely to be helped by Vivendi’s disposal of its stake.
MSDW on one hand praises Sky’s management led by Tony Ball, as “to be amongst the best in the European media industry”. But on the other says it is disappointed in Sky’s performance “given that the penetration of its channels in cable homes continues to decline”. Of course, Sky might fairly be said to have had little to do with cable’s near- deliberate exclusion of Sky’s premium and other channels citing high wholesale costs on a per-channel basis which effectively eliminated any retail revenue for the cablecos.
BSkyB has since struck a “step-change” rapprochement with UK cable leader NTL, which includes a reduction in the absolute rates for Sky’s premium channels in return for NTL guaranteeing carriage. “Both sides say they benefit,” says MSDW senior analyst Sarah Simon. “NTL gets better rates and BSkyB increases volumes and therefore has potentially higher revenues in the longer term.” Sky is obliged to offer the same wholesale terms to Telewest, and ONdigital.
Indeed, MSDW issues a warning for Sky, saying it “believes cable is coming into its own [and] the balance of power is set to shift” away from Sky and into cable’s broadband- rich portfolio of products. However, having kissed and made up with one cable outfit there is a downside risk for Sky, says MSDW. “If cable operators get better terms from Sky’s programming arm then they may be able to better compete with Sky on pricing the retail product.”
Nevertheless MSDW says it is fully on board as regards Sky’s DTH target of 7 million subs target, and praises the recently introduced WML browser which “should allow more impromptu purchases”. But what MSDW giveth, it can also take away, arguing that it cannot see where Sky gets its GBP50 average revenue per home income on “non-traditional pay-TV services”, and says Sky has set itself an annual target of GBP400 per home “in the medium term”, although they quote Tony Ball as targeting a GBP450 figure. Revenue/home for the year to June 2000 was GBP287, causing MSDW to view Ball’s target as “very optimistic” and suggesting a more realistic figure to be GBP348 by around 2005.
MSDW breaks down its GBP8.24 valuation as Disco = GBP3.9 billion, Broadco = GBP9.9 billion, or GBP13.7 billion in enterprise value or, after GBP1.7 billion of net debt is deducted, gives GBP6.40 a share. Add in Open’s GBP1.8 billion value, plus the rest of Sky New Media, and Sky Ventures and the value creeps up to GBP7.40 a share.
Extra pennies/share come from Sky’s soccer club holdings (Manchester United etc), with around 74p added for Sky’s 22 per cent stake in Premiere World.