BSkyB Stock Drops Following English Soccer TV Rights Deal
Analysts cite a high price tag paid by the pay TV giant and increased competition from BT, which emerged as a second rights holder.
LONDON - BSkyB's stock dropped more than 6 percent in early Thursday trading here after analysts chimed in on the English Premier League TV soccer rights deals struck Wednesday for the U.K. market, expressing concern about the high price paid by the pay TV giant.
And they described new smaller rights holder and telecom giant BT as a potential emerging threat to BSkyB, which built its subscriber base of about 10 million with the soccer rights as its crown jewel. BT's deal marks the first time that a second rights holder in the U.K. gets to show a package that includes some of the most attractive league games.
As of 9:40 a.m. London time, BSkyB shares were down 6.8 percent at 648.50 pence ($10), closer to its 52-week low of 613.83 pence.
"This English Premier League outcome comes as a negative surprise, and we believe market expectations were for a favorable outcome," said UBS analyst Polo Tang. "With increased competition from BT and downside risk to [financial] estimates, we would expect a negative reaction in the share price" of BSkyB, in which Rupert Murdoch's News Corp. holds a 39 percent stake.
Walt Disney's ESPN lost out to BT, formerly known as British Telecom, which like BSkyB before it seems to look for attractive sports to help it attract pay TV subscribers. "We see BT as a more dangerous competitor than ESPN, and there may be a risk BT seeks to acquire more sports content," Tang said.
Sanford C. Bernstein analysts Robin Bienenstock and Claudio Aspesi highlighted that BSkyB's deal price tag means an increase of 40 percent over the previous rights deal, or more than twice the consensus expectation of around 15 - 20 percent among analysts. And they argued it is a sign of a U.K. pay TV market that is indeed becoming more competitive.
"Skyrocketing live football costs are indicative of wider challenges for BSkyB," they said, highlighting telecom video advances and over-the-top broadband alternatives as examples.
Aspesi emphasized that BSkyB not only had to pay up, but also leave BT nearly half of the most attractive soccer games every season. "It is both a shocking sticker price and a loss of valuable rights to BT - the one company which represents a long term threat to Sky," he told THR. "The world is getting more complicated for them after today."
Meanwhile, "BT is clearly reinforcing its TV offer to drive usage, infinity uptake and market share," the Bernstein analysts said. "A stronger TV offer at BT is symptomatic of increasing regional and business model overlap."
Tang in a report also said that BSkyB paid a high price. "Assuming nothing else changes, the incremental £140 million ($217 million) per annum of cost would lead to an 11 percent downgrade to June 2014 earnings per share," he said. "However, BSkyB believe they can offset all of this with [analysts] having overestimated programming spend by £70 million ($108.5 million) per annum and cost savings of £70 million per annum."
Tang also took BT's rise as a soccer competitor as a negative surprise for BSkyB. "Of greater concern is the surprise entry of BT that intends to set up a new sports channel in order to drive take-up" of its video offering," he said.
Jefferies & Co. analyst Jerry Dellis said the EPL deal "greatly enhances BT's pay TV offering and improves leverage to wholesale additional Sky content on more favorable terms." Overall, this should "draw more consumers to BT [video offerings] and strengthen triple-play credibility versus [cable operator Virgin Media and Sky."
Meanwhile, Walt Disney's ESPN got high marks from Morgan Stanley analyst Benjamin Swinburne for being fiscally prudent in its bid for the EPL rights. "BT's 38 games in the new deal cost about 180 percent more per game than ESPN's current 23 games," he calculated. "Given our estimate that ESPN U.K. generates only $115 million-$130 million per annum, a winning bid would have almost certainly proven uneconomic, and the willingness to walk away supports our view that ESPN can expand margins over time."
He added: "As this follows Disney's' recently announced sale of its 50 percent stake in [Asia's] ESPN Star Sports [joint venture with News Corp.], it appears that ESPN may be increasingly selective in its approach to international markets."