I believe Sky Deutschland is poised to significantly increase German/Austrian ‘Premium’ Pay-TV penetration with its exclusive sports and movie content and extensive HD offerings. With financing in place and Bundesliga broadcast rights secured, SKYD GR should experience accelerating subscriber momentum and a significant improvement in top-line and EBITDA growth. Ultimately, I believe FOXA will acquire the remaining stake in SKYD GR over the near/medium-term.
SKYD’s market opportunity is significant with ~45mm German/Austrian homes vs. ~3.405mm SKYD subscribers today (Mar 31 2013)
By securing the Bundesliga rights thru the next cycle, SKYD now has visibility on its business for the next four years until the next cycle of rights thru 2016/17
By partnering with the cable companies and Deutsche Telekom, SKYD can enable direct subscriber billing relationships in return for a revenue share to accelerate subscriber momentum – similar to its deals with KBW and UnityMedia; DT has said it is keen to such an agreement with SKYD, but it likely will take some time to negotiate
By completing the remaining €144mm of a total €300mm capital raise, SKYD will have fully-funded its business plan to breakeven FCF; bank debt refinancing should drop into place in the near-term
21st Century Fox owns 54.5% of SKYD GR - now that FOXA is demerged from NWSA with $8B in cash and $4B in annual FCF - I would expect a consolidation of the remaining SKYD GR stake in the near/medium-term
Recent decision by German tax authorities declared that SKYD can retain a significant portion of its tax loss carryforwards (over €2B in NOLs) in the event FOXA were to take a larger stake in SKYD GR
SKYD is demonstrating record levels of customer satisfaction and growing levels of recommendations (>40% of gross adds came from friends and family vs. <10% historically)
Industry Backdrop
‘Low Pay-TV penetration’ is somewhat of a misnomer as the majority of German TV households pay a subscription fee for free-to-air content (either 100 digital or 35 analog channels) – running ~€16/month
Cable networks pass ~28mm households, of which ~19mm receive a TV signal from them
Roughly half pay the cable operator directly (B2C) @€16/month and the other half (B2B) pays through their housing association @€7/month
~70% of B2C customers receive the digital free-to-air channels
~10% of B2B customers receive the digital free-to-air channels
B2B customers pay for their TV thru an ancillary charge to the housing association which residents cannot opt out of; Housing associations has a long term contract with the cable operator ranging from a few years (for smaller organization) to 10+ years for the larger ones
Cable operators have steadily been increasing basic TV prices over the last few years:
2006: KDG stopped selling analogue services to B2C households, leaving €14/month for the digital channels as the only option
Apr 2006: KDG increased to €16.90/month for new customers, providing a free set-top box to encourage the transition to digital
2010: KDG increased €17.90/month
2012: KDG recently increased the basic TV price to €18.90/month and included 6 HD channels (‘HD Private’ package)
Unlike everywhere else in the world, broadcasters pay cable operators carriage fees to transmit their channels to customers
Bundesliga: What happened with Premiere (now SKYD) in 2006?
In Dec 2005, the DFL announced that UnityMedia had won the Bundesliga rights for the 2006/7 thru 2008/09 seasons at a flat cost of €250mm/year
At the time, UnityMedia was only present in two out of the 16 German states – making for an odd decision to with Unity
The press reported SKYD GR (called Premiere back then) was offering around €300mm/year – significantly higher than Unity’s offer – but only on the condition the free-to-air highlights were moved back to 10pm from 6:30pm
Pressure from both sponsors and politicians mounted, causing the DFL to reluctantly go with UnityMedia on the assumption it would do a deal with Kabel Deutschland (in 13 states) for near-national coverage, but that deal never happened
Not only was Premiere weakened significantly, but UnityMedia could not effectively monetize the rights causing a large drop-off Bundesliga viewership as well as causing several sponsors to cease support
When it was announced Premiere had lost the Bundesliga rights in Dec 2005, its share price fell ~44% in a single trading day – and it proceeded to lose ~800k subs over the next three years
After the ensuing profit warnings and management shakeup, NWSA took a significant stake in Premiere and rebranded the company Sky Deutschland in 2009
Description
Sky Deutschland is the leading Pay-TV operator in Germany and Austria with ~3.4mm subscribers. SKYD has agreements with most major movie studios and a number of sports events, including exclusive Bundesliga football rights thru 2016/2017 and the Champions League. Sky Deutschland is 54.5% owned by 21st Century Fox (FOXA).
Bundesliga Renewal
SKYD GR won the exclusive Bundesliga rights across all platforms – cable & satellite, IPTV and mobile & internet – for the 2013/14 thru 2016/17 seasons for ~€486m/year over the four years
Previously, it had paid ~€250mm/year but it did not have mobile or IPTV rights
With full control of the Bundesliga rights – SKYD now has some scope to increase prices, reduce discounts and potentially adjust packages to include/upsell Sky Atlantic (Sky Movies) and HD channels
SKYD paid a ‘full price’ for the Bundesliga rights, and now must monetize the rights – likely with IPTV agreements with DT, and potentially both VOD and O2 (for Bundesliga and full-content offering
DT has already announced plans to terminate its LIGA Total product – taken by ~10% of its 1.7mm TV subs) and should lead to a marketing agreement with SKYD for its full-content offering
SKYD has all the leverage here, as the DSL operators really need a strong content offering to defend against cable churn
2 free Bundesliga matches per season are available on Free TV
Kabel BW offers all SKYD’s HD channels, KDG offers most of them and today UnityMedia only offers one of SKYD’s HD channels – though this seems to changing
SKYD has exclusive content on other sports, as well as broadcasting Hollywood movies – though these movies are typically available to VOD after a small time lag (except HBO/HD)
Cable Partnerships
SKYD has announced cable partnership deals with UnityMedia (owned by LBTYA), KBW and (soon-to-be announced Kabel Deutschland
Under the current deals, they jointly market a triple-play bundle with cable offering the broadband/telephony (plus billing/customer service) and SKYD providing Pay-TV offerings
Customers receiving the SKYD service via cable will also get more HD content (up to 18 channels), as well as the new HBO Sky Atlantic channel
As part of the agreement, both UnityMedia and KBW will offer more of SKYD's HD channels plus its new HBO Sky Atlantic channel
UnityMedia will soon offer up to 15 SKYD HD channels (up from one), while KBW will offer up to 18
Bottom Line: I would expect higher HD uptake and higher subscriber growth with lower SAC – in return for a revenue share; would further expect deals with KD8 and DT over the medium-term
Outlook/Guidance
With the exclusive Bundesliga rights (starting in 2013), SKYD expects to see accelerating net adds (subscribers growth) from 2013 onwards. Official guidance is as follows:
Full year 2012 EBITDA expected to be significantly better than 2011
Full year 2013 EBITDA to be positive and to grow strongly thereafter
Consensus initially assumed a moderation or even tailing off in net adds next year – but I believe SKYD should gain subscribers for the following reasons:
Gain of the former DT Bundesliga subscribers mentioned earlier (~10% of the 1.7mm DT ‘Entertain’ customers subscribe to LIGA Total)
Growing critical mass with record levels of customer satisfaction leading to an increasing number of customer referrals/word of mouth in a relatively under-developed German pay-TV market
SKYD aggressively pushing growth by either giving away free Sky+HD boxes and/or offering their Sky Go service as a stand-alone OTT/online offering at a cheaper price
SKYD has been active in using promotions/discounts on its subscriptions to drive subscriber growth and try out its products. However, Bundesliga exclusivity should translate in some pricing power – leading to fewer discounts. Ultimately, SKYD may focus its promotional activity on giving away Sky+HD boxes (hardware discounts) vs. discounting subscriptions (software discounts) – leading to higher profitability over the longer-term.
Capital Raise
SKYD has stated that the Bundesliga cost was already factored into the existing financing plans, and they will need to raise more than the €300mm already outlined
Of the €300mm capital raise, €156mm was completed in Feb 2012 with the remainder initially to be completed by the end of Sept 2012
While management initially stated the financing would likely be thru a convert, shareholder loan or rights issue – the Bundesliga renewal and the implicit backing of FOXA may be sufficient to sway the banks into expanding their existing banking facilities when they expire at the end of 2013 – far cheaper than issuing further equity
Bear Case
Low Pay-TV penetration. Germans have historically shied away from paying for TV, impeding SKYD GR’s ability to grow subs. Germany/Austria has among the lowest Pay-TV penetrations among global developed markets at ~14.5% in ‘11 (vs. ~11.6% in ’10)
With exclusive content and an extensive HD offering, SKYD GR has been growing subs at an accelerated pace and gaining momentum among German households
Low barriers to entry.In theory, any entity with enough capital can acquire content and enter this business. SKYD GR’s differentiation is exclusive sports (Bundesliga rights; Sky Sports News) and movie (HBO thru Sky Atlantic HD; first-run Hollywood movies) content, and extensive array of HD channels
Not fully-funded biz model. From 2004 to 2011, SKYD GR’s share count increased from ~77mm shares to +700mm shares currently as they met funding needs thru a combo of equity offerings, rights offerings and shareholder loans (~$1.5B cumulative financing since ’05)
SKYD GR remains heavily levered with €580mm of debt and is expected to be loss-making again in 2013 on an earnings basis, but +ve on EBITDA
I do not hold a position of employment, directorship, or consultancy with the issuer. I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
Q2 Earnings results.
Bank refinancing. SKYD GR has €525mm of bank facilities set to expire in 2013. Given the positive Bundesliga outcome, management is likely move quickly to complete the refinancing
Unbundling Sky GO. Creating Sky GO as a standalone online/OTT product would likely drive significant drive subscriber growth
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