Sky Network Television doesn't have an attractive future as a "pure" standalone pay-TV business in the longer term as it faces increased rivalry and a "fundamental deterioration" in its strategic position, according to Grant Samuel, the independent adviser and appraiser of its merger proposal with Vodafone NZ.
The Auckland-based companies plan to merge to create the country's largest telecommunications and media group in a $3.44 billion deal that would give Vodafone Europe a 51 per cent share in the combined group. Sky directors unanimously recommend its shareholders vote in favour of the deal at a July 6 meeting, and Grant Samuel has said the deal is "fair".
Sky TV earnings are in decline as it loses subscribers on its dominant satellite-TV service and faces higher content costs because of increased rivalry from internet-based services such as Netflix. For Vodafone, the country's largest mobile phone provider and second-largest broadband service, the deal gives it access to content to feed through its channels. Without a meaningful broadband or phone service offered through a tie-up with Vodafone, Sky TV is in a "strategically weak position" to attract and retain customers, Grant Samuel says.
"Sky TV's strategic position as a 'pure play' pay-television operator is not attractive over the longer term," Grant Samuel said in a summary of its independent adviser's report and appraisal report released today. "Shareholders in a standalone Sky TV would be exposed to numerous risks, some of which, over time, could potentially threaten the viability of the business.
"In Grant Samuel's view, the strategic benefits of the proposed transaction are such that Sky TV shareholders will clearly be better off if the proposed transaction is implemented than if they continue as shareholders in a standalone Sky TV."
A merger will "materially improve" the combined group's competitive position and should generate savings and increased revenue over time, Grant Samuel said, noting the benefits would be more limited in the short term. While the roll-out of ultra-fast broadband is a threat for Sky TV, because it enables consumers to more easily access rival internet-based services, for the combined group it provides an opportunity to lower distribution costs and deliver new products using Sky TV's content in different ways, the report said.
"The proposed transaction will in a single step transform Sky TV's competitive position in the New Zealand market. It will be transformational for Sky TV, creating a business unique in the New Zealand market place," Grant Samuel said. "The merged Sky TV and Vodafone NZ business will have market leading positions in mobile telephony and pay television, a strong fixed-line telephony and broadband internet business, extensive infrastructure and the leading content offering in the New Zealand market."
Grant Samuel says the terms of the deal are attractive for Sky TV, which sees it acquiring Vodafone NZ via cash and shares for an estimated value of $3.255 billion to $3.463 billion, below its estimated value of $3.4 billion to $3.7 billion. Sky TV will own 49 per cent of the combined group but is estimated to contribute just 46 percent to 47 per cent to its value.
It notes the strengthened strategic position of the combined group should attract a higher market rating than for Sky TV on a standalone basis.
Shares in Sky slipped 0.6 per cent to $4.97, and have gained 8.9 per cent this year.