Analyst Cuts Sky Stock Rating on Rising Soccer Costs

The latest English Premier League rights auction "further confirms that we are in a time when the value of content trumps the value of distribution," says Sanford C. Bernstein's Claudio Aspesi.

Sanford C. Bernstein analyst Claudio Aspesi on Thursday cut his rating on the stock of pan-European pay TV giant Sky from "outperform" to "market perform," citing an expensive TV rights deal that will see the company remain the main home of live English Premier League matches in Britain. 

Aspesi entitled his report "No Gold Pot at the End of the Rainbow" and also cut his price target on the shares of Sky, in which Rupert Murdoch's 21st Century Fox owns a 39 percent stake.

He wrote that the outcome of the soccer rights auction "leads us to both narrow our earnings per share gap with consensus [expectations] and deprives us of the catalyst we had identified as a driver of our "outperform" rating."

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Sky shares had dropped on Wednesday as investors and analysts expressed concern about the higher price tag of the latest soccer rights auction.

In the auction, longtime rights holder Sky won five of seven TV rights packages for soccer games in a three-year deal, with telecom giant BT also continuing as a holder of rights with the two other packages. Sky got rights to 126 matches per season for $6.37 billion over three years starting with the 2016/2017 season, up 83 percent from the current deal. Discovery Communications and its Eurosport network were also believed to have been in the running for the rights, but didn't end up with any packages.

Sky has said it would cut costs and raise prices to help pay for the higher soccer rights deal. "Near term, cost savings should spare Sky significant earnings per share declines," Aspesi said. But he said that the firm's soccer costs "are rising very fast as a percentage of subscription revenues."

"Sky has a history of delivering on costs, and we will give them the benefit of doubt" on the cost front, the analyst wrote. "Incremental pricing increases are more doubtful and likely to be dependent on the economy."

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Aspesi also expressed concern about future sports rights auctions and further price inflation. "We have no way of knowing and will take management's word that the company has done the best possible job under the circumstances of the auction," he said. "However, we do not find this conclusion satisfying. Had management made mistakes, then these could at least be fixed at the next auction. If, on the other hand, this is the best possible outcome, than shareholders should ask tough questions about the outlook for the company."

Aspesi argued that if English Premier League soccer rights inflation continues the current trend line, "this trajectory will be untenable over time." He concluded: "This auction further confirms that we are in a time when the value of content trumps the value of distribution. There are ebbs and flows in the relationship between content and distribution, and at some point in the future the balance will shift again, but — for the time being — this auction confirms that content is winning."

Email: Georg.Szalai@THR.com
Twitter: @georgszalai

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