Investment Community Delivers Positive Message

One of the main messages at last week’s Euroconsult “DTH World Summit for Satellite TV Platforms & Channels” in Paris is that the investment community is keen to invest in satellite Direct-To-Home (DTH) businesses, despite the emergence of digital terrestrial television (DTT), TV over DSL and other alternatives. Investment bankers around the globe painted a positive image of how the financial community sees satellite businesses. In most markets, satellite has consistently outperformed cable, and the keys for future success will be securing content deals at attractive rates.

Mark Beilby, a media analyst at JP Morgan, commented: “From a European perspective, I don’t see anything other than an increase of programming costs. Because of the structural changes in the industry, the perception among operators about what is the most valuable content will crystallize. The value of soccer and premium movies becomes greater and greater.”

One of the last major satellite TV businesses to be brought to market was Astro All Asia Networks, a DTH business in Malaysia (see related story in this issue). The IPO, which launched in October 2003, raised $530 million and was 15 times oversubscribed. David Curley, director/media investment banking at UBS, said this financing is a good example of how the investment community views DTH businesses. These businesses generally have outpaced the opposition in key markets in Western Europe as well as in the United States. Consequently, they represent attractive investment opportunities.

“Equity markets are demanding DTH businesses,” he said.

One of the next potential IPOs in this area could be offered by Premiere in Germany. Because the operator’s prospects appear much better than they did a couple of years ago, there is likely to be healthy interest.

In terms of the metrics on which investors focus, the importance of free cash flow (FCF) was emphasized by the panelists. However, Mark Piegza, managing director/telecom and media at Banc of America, downplayed the importance of subscriber acquisition costs (SAC) to investments, particularly in relation to programming costs.

“Average revenue per user (ARPU) had the most dramatic effect on FCF. ARPU and programming costs apply to the whole subscriber base. The key is keeping existing subscribers, and creating value for investors,” he said. “The impact of SAC is much less important than people think, he suggested. DTH operators need to spend money to create sticky customers. They need to spend money on multiple set-top boxes (STBs) and personal video recorders (PVRs).” The reward is that consumers churn much less, Piegza said, and higher charges can be assessed.

There have been other significant deals in this space. In Spain, Sogecable (the owners of the Digital+ platform) has been able to raise funds after the merger of the two DTH platforms, Canal Satelite and Via Digital. In June 2003, Sogecable secured a 7.5-year maturity syndicated facility of $1.7 billion to finance the restructuring process. The Spanish pay-TV market has been relatively slow compared with some others in Europe. With Sogecable having a strong market position, the Spanish pay-TV business is expected to grow well.

Stéphane Bailly, head of the telecoms group at Crédit Agricole Indosuez, commented, “Spain has high TV consumption in terms of the number of minutes watched per day. Cable TV in Spain is relatively young and fragmented. Sogecable has good access to content. It also has good contracts with the major film studios.”

Programming costs, as a factor of overall revenues, also is a key consideration. DTH businesses with content owners are likely to be successful as they provide a better range of content to the consumer. Content is key, and it underpins the whole DTH business. However, keeping the programming costs down is a major challenge along with being one of the key barometers for a DTH business. BSkyB is a great example, because it invests heavily in content. This willingness to spend, combined with the sports rights it owns, can put forward compelling content packages to the consumer.

Piegza believes DTH operators could look to buy content companies. “Buying content companies is one way to fend off the never-ending price increases in content rights,” he said. “There is a need to negotiate better content deals.” David Grover, associate director/satellite and media finance at Barclays Capital, also addressed that idea. “Almost all successful DTH operators are controlled by content owners. Distributors with the most subscribers have crucial advantages,” he said. “They are in a better negotiating position with programmers. They can spread the costs over a larger subscriber base.”

Comcast’s recent attempt to acquire Disney is an indication that the next phase of deal making is likely to be in the content arena.

Cable Threat

One of the reasons why DTH businesses look to be good investments has been its apparent dominance over cable in a number of markets. However, Grover warned the cable threat should not be underestimated.

“DTH’s digital lead now is eroding. Over $80 billion has been spent on digital cable upgrades in the United States alone,” he said. “Where upgraded, cable has a formidable distribution platform. You have services, such as digital video, video-on-demand (VoD), high-speed data, two-way interactivity, etc.”

In terms of the competitive threat in Europe, Ian Whittaker, a media equity analyst at ABN Amro, believes these companies will focus more on the broadband markets, and they will see the telco as their natural enemy rather than the satellite pay-TV provider. “The big opportunity for cable operators is in broadband; that is where the focus is going to be,” he commented. –Mark Holmes

(Ian Whittaker, ABN Amro, +44 207 678 8000; Mark Beilby, J.P. Morgan, +44 207 777 2000; David Grover, Barclays Capital, +44 207 623 2323; Marc Piegza, Banc of America, 212/583- 8000)