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UK Equities
Football rights auction pressure hits Sky
From the Financial Times of Fri, 12 Dec 2014 18:58:19 GMT

How much does Sky need to win next year’s Premier League rights auction? According to Merrill Lynch, defeat would wipe more than 80 per cent off the broadcaster’s stock.

The football rights auction expected early next year is a must-win for Sky, which currently broadcasts 75 per cent of the matches at a price of £760m per season, said Merrill. Losing to BT could cost Sky around 30 per cent of its high-value sports customers as well as associated commercial revenue, which has the potential to more than halve group earnings, it forecast.

The cost of buying in BT’s channels to show on the Sky network would be even more onerous, Merrill said. It forecast a hit to earnings of 70 per cent that, without substantial changes to its business model, would leave Sky with negative equity.

Merrill’s base case was that Sky pays 30 per cent more to retain its current share of Premier League rights. That led the broker to put a 650p target on the shares, which closed lower by 1.7 per cent to 902.5p.

“Sky levered its balance sheet to pay for Fox’s lossmaking European assets and now faces structural challenges with leverage as well as fixed costs,” said Merrill. Because it does not own the majority of its content or its network, Sky looks particularly vulnerable to competition from net streaming services and companies offering TV to push other services, the broker argued.

A fifth straight fall for the FTSE 100 left the index with its worst week since August 2011. The index lost 2.5 per cent to 6,300.63, a 161.07 point decline.

For the week the FTSE was down 6.6 per cent.

Oil services company Petrofac was Friday’s biggest blue-chip faller, off 6.4 per cent to 678p. Deutsche Bank warned of “meaningful downside risks” to consensus earnings estimates and saw cash flow put at risk by Petrofac’s reluctance to cut either its dividend or its capital expenditure.

As part of the same research Deutsche also downgraded Amec Foster Wheeler, down 4.3 per cent to 803p, and Hunting, off 7.1 per cent to 471.1p. Even after their fall, the worst-case scenario is still not priced into oil services stocks, with the consensus still expecting 38 per cent sector earnings growth next year, it said.

Drax, the power station owner, fell 9.9 per cent to 508.5p after the Department of Energy & Climate Change said it was looking to deter further investment in converting coal-fired power stations to run on biomass. The government U-turn was seen to undermine the economics of Drax converting a fourth turbine to burn biomass, which analysts had valued at around 100p per share.

United Utilities led the water companies higher after regulator Ofwat, as part of its final ruling on price caps until 2020, set out reduced spending requirements that were closer to the company’s own plan than earlier drafts. The other terms were little changed, sending United 3.6 per cent higher to 903p and lifting Severn Trent 1.1 per cent to £19.37.



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