Credit Suisse: Sky faces earnings risk as football auction looms

Dreh zum Werbespot SKY am 18.06.2009 in Kšln Rhein Energy StadionThe next round of auctions for rights to English Premier League football will be critical to BSkyB’s future and its battle with BT will likely lead to a large inflation in costs, according to an investment note from Credit Suisse.

Maintaining its ‘underperform’ rating on Sky, despite what it admitted were results that exceeded expectations, Credit Suisse said that the forthcoming rights auction “remains the key event” and that it is “strategically important for Sky to regain control over the majority of…matches, given the contribution to its profitability”.

Credit Suisse does not expect Sky and BT to strike a reciprocal wholesale agreement ahead of the auction that could reduce the need for each to try to outbid the other. Instead, it based its rating on a likely 60% increase in costs to £1.2 billion for the rights.

Setting a 600p (€0.73) target for Sky’s shares against its April 28 actual price of 900.5p, the bank said that the auction, expected in the second half of this year, “has the potential to significantly outweigh the positive momentum Sky has operationally”.

It said that “Sky’s BT problem has not gone away” and that a battle between the pair for rights, leading to cost inflation from the 2015-16 financial year, carried a significant earnings risk for the operator in 2017.

Credit Suisse said that Sky’s Q3 net additions to its TV base of 74,000 were double what it expected, but estimated that the total included 50,000 customers for Sky’s lower-cost Now TV OTT offering.

Credit Suisse also noted that on-demand viewing on the Sky platform has grown from 1% to 5% in two years, showing that a major shift in consumer behaviour on the platform is underway.

Broadband additions were in line with expectations while telephony additions were slightly ahead, and churn remains low.

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