Sky Stock Drops as Analysts Lament Rising Cost of English Soccer Rights

Machester United Liverpool English Premiere League - H 2014
AP Photo/Jon Super

"We doubt that Sky can recover the extra costs," says one analyst about the Euro pay TV giant, in which Rupert Murdoch's 21st Century Fox owns a 39 percent stake.

The stock of pan-European pay TV giant Sky, in which Rupert Murdoch's 21st Century Fox owns a 39 percent stake, trended lower on Wednesday as analysts highlighted the high cost of a new English Premier League (EPL) soccer rights deal unveiled late Tuesday.

As of 9:40 a.m. London time, Sky's stock was down 4 percent at $14.00 (£9.16) after earlier falling as much as 5 percent.

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In the latest EPL auction, longtime rights holder Sky won five of seven TV rights packages for soccer games in a three-year deal, with BT, formerly known as British Telecom, 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 $3.55 billion in the previous 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. The value of the three-season rights deal agreed with Sky and BT is $7.84 billion (£5.136 billion), up 70 percent.

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UBS analyst Polo Tang in a report on Wednesday said that the soccer rights auction yielded a "good outcome." But he also highlighted that "consensus was expecting the status quo in terms of the split of rights, but with a 45 percent increase in costs."

Liberum Capital analyst Ian Whittaker cut his price target on Sky from $12.99 (£8.50) to $8.10 (£5.30), citing the big price increase. "Sky has won the majority of the Premier League rights for 2016/2017 to 2018/2019, but at a very high cost," he wrote in cutting his fiscal year 2017 and 2018 earnings estimates. "We doubt that Sky can recover the extra costs both on the revenue and cost side. Perhaps more worrying is the question that the outcome of the auction raises about Sky's future valuation, as the stock's terminal value has suddenly become harder to predict given such price inflation."

And Sanford C. Bernstein analyst Claudio Aspesi, who had started off the year with a bullish report on Sky, said the outcome of the soccer rights auction "surprised us negatively." He wrote: "Sky will argue that it has secured the rights it wants and that it can meet its financial objectives through savings in other areas. Indeed, this may be correct, but misses the key point. This was the time for Sky to challenge the [league] and exit an unsustainable trajectory. If Sky cannot control inflation with the stars aligned, one wonders about the outcome of future auctions."

Sky said after the soccer rights deal: "The price paid per annum is around £330 million ($504 million) more than analysts’ forecasts. Sky has a clear set of plans in place to fund the bid and deliver its financial plans in line with expectations. The company will work hard to minimize the impact of higher rights costs on customers, with the majority of the funding coming through substantial additional savings to be delivered by efficiency plans."

Added Sky CEO Jeremy Darroch: "Our strong performance across the board gives us financial strength and flexibility. We have a clear plan to absorb the cost of the new Premier League deal while delivering our financial plans."

Twitter: @georgszalai