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The Sky TV and Vodafone Acquisition


Sky Network Television’s proposed acquisition of Vodafone New Zealand is an admission that structural pressures on its pay-TV model are too great for the firm to handle solo. It has instead opted to go down the convergence path and acquire a telecom entity: one that is the leading mobile operator but in a country that Vodafone’s parent appears to view as a mature, marginal market. The acquisition multiple of 7.1 times Vodafone NZ’s fiscal 2017 EBITDA is reasonable, especially as 64% of the NZD 3.4 billion consideration will be funded by issuing new shares to Vodafone at 8.0 times Sky’s fiscal 2017 estimated EBITDA (NZD 5.40, or 20%-plus above recent price levels). There are also synergies galore, amounting to a net present value of NZD 850 million (NZD 1.07 per share). As such, we appreciate why investors have embraced the proposed deal, with narrow-moat Sky's shares now trading at a 20% premium to our intrinsic assessment. On the flip side, point-based multiples can be tenuous for industries facing secular headwinds. We expect digital and streaming providers’ disruptive impact on Sky’s linear delivery of bundled pay channels to intensify, with the recent profit decline likely to continue. Vodafone NZ’s EBITDA has also been under pressure in recent years due to competition in the mobile and broadband space (although management is predicting a 6% recovery in fiscal 2017). While there are revenue (differentiation via mobile/data/video triple play, monetisation of content across multiple platforms) and cost (overheads, procurement, capital expenditures) synergies, the magnitude and timing of their realisation is far from clear, particularly in the face of technological changes.

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