BSkyB spends big to conquer Europe

British Sky Broadcasting had lots to say on Friday, although the market clearly didn't like what it heard and the shares fell 5%. It wasn't the largely in-line full-year results that bothered number crunchers, but the acquisition of Sky Italia and over half of Sky Deutschland from Rupert Murdoch's 21st Century Fox.

Sky is paying £2.45 billion for Sky Italia, most of it in cash, and £2.9 billion for Fox's 57% stake in the German business. It reckons the deals will be "at least neutral" to earnings per share in the second full financial year of ownership and "strongly enhancing" to earnings per share (EPS) after that. There'll be £200 million of annual cost savings, too.

Once complete, Sky will be the dominant player in three of the four largest European TV markets with an estimated 20 million retail customers and over 97 million targetable customer households.

But of course, chief executive Jeremy Darroch has had to the find money to fund his spending spree. That's why the company is placing over 156 million shares in the market, almost 10% of the existing business. Fox is taking up 61 million to maintain its percentage stake, but the rest must find a home elsewhere, which explains a slump in the share price to 874p. Suspending the share buyback scheme has pulled the rug away, too.

On the results front, adjusted revenue rose 7% to £4.6 billion in the year to June following Sky's strongest growth in new customers for three years. However, higher Premiership football costs meant underlying operating profit fell by 5% to £1.26 billion, giving adjusted EPS of 60p.

But Westhouse Securities analyst Roddy Davidson still has some questions for Sky's top brass.

"We are a little more sceptical on the implications of the Fox deal and will look for more information this morning on (a) the challenge involved in driving pay TV penetration in a so far fairly unreceptive German market (currently c.10% vs. c.50% in the UK), (b) the weak competitive position of Sky Italia, (c) implied funding requirements and, importantly, (d) the management resource required to take on these challenges at a time when it is pursuing a broad range of growth opportunities in the UK and confronting its first major content competitor in the form of BT," he says.

All of these are valid concerns, and although a forward price/earnings ratio of 14 is more modest than in recent times, the threat from BT remains a serious concern.

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