NZ Rugby faces two big questions after Sky's big announcements today.
Firstly, how much the company will want to claw back from its current broadcast rights deal; and secondly whether it will throw up to $7.4m in good money after bad and participate in a $157m rights issue - or see its stake heavily diluted.
The union got a 5 per cent stake in Sky as part of the pay-TV provider's successful bid to renew Sanzaar rights (understood by the Herald to worth a total $400m over five years).
The October 2019 deal saw NZ Rugby issued with just over 21.8m Sky shares at 92 cents, valuing them at $20.06m.
At the time, it was relatively easy to spin a positive narrative around what both sides had pitched as an "innovative" deal.
Sure they had cost a bundle, but Sky had bought itself breathing space. With A-list rugby rights in the bag, new-ish CEO Martin Stewart could step back and focus on the larger restructure toward streaming. Shares would recover from what was, then, an all-time low.
But then there were rumbles about South African teams defecting north and in the March, Super Rugby as we know it was obliterated as the sports calendar overall was obliterated by Covid-19.
Sky shares went into a tailspin, reaching as low as 19c on March 23, valuing NZ Rugby's stake at just $4.1m. They had recovered to 33c by market close Wednesday, and the shares are now in a trading halt while the company conducts a share placement ahead of the rights issue.
Hamilton Hindin Greene adviser Grant Davies notes that unless NZ Rugby participates in the $157m rights issue, it will see its stake in Sky diminished to just 1.3 per cent
But if it exercises its option to maintain its 5 per cent level by participating in the issue, that will cost it some $7.4m.
This is not a time when NZ Rugby has that sort of money in its back pocket, with 2020 Super Rugby scaled-back to a limited domestic-only competition.
Covid-19 has put it under pressure, and it's about to be put under more by Sky, according to an investor presentation released this morning that included the line: "For some sports contracts Sky has a reasonable expectation of a negotiated reduction in sports programming rights costs broadly proportionate to the content delivered."
Covid-19 clawback has become a big issue between sports bodies and broadcasters worldwide. English Premier League clubs were staring down the barrel of £340m in repayments to domestic and international broadcasters before they hatched a plan to finish the season in a rush of games in empty stadiums next month.
Sky external relations director Chris Major elaborated to the Herald, "A number of our sports contracts have force majeure and equitable reduction clauses, and we're having discussions with our sports partners now.
"As we noted in our announcement today, our negotiations also have a view to support the future health of our sports partnerships."
Major would not comment on any code specifically, but she did add that Sky's negotiations centre on the current season, whereas Sky's new Sanzaar deal kicks off next year - so any money clawed back will be from NZ Rugby's current deal (which the Herald understands is worth around 20 per cent less than the new deal).
Major took issue with the term clawback, saying constructive discussions were underway.
A spokeswoman for NZ Rugby said, "All New Zealand Rugby's discussions about our shareholding in Sky and our contract with them were confidential."
Broadband: why did Sky wait so long?
Sky also confirmed a long-rumoured move into the broadband market, saying Sky Broadband would launch next year. The company would partner with an unnamed existing provider to minimise new investment.
The company said it was also mulling a possible move into the mobile market through an MVNO (mobile virtual network operator) deal - which would allow it to sell a rebadged version of Sky, Vodafone or 2degrees' service.
Hamilton Hindin Greene's Davies was bullish about Sky's move into broadband.
"Bundling is the key to retaining customers and maintaining margins. It's a key way businesses avoid competing on price alone," Davies said.
"I'm surprised they haven't done it sooner."
(Sky did attempt it sooner, to a fashion, with its thwarted attempt to merge with Vodafone. That deal was blocked on fears that Sky's dominance in sports content could be unfairly leveraged to extend Vodafone's lead in mobile. But the competitive landscape has since shifted, notably with Spark offering Rugby World Cup 2019 passes free to new broadband customers.)
Fat Prophets research head Greg Smith was also positive on Sky's ISP play.
"This is now looking like a turf war with Spark on several fronts," Smith said.
"Spark cannot complain given their move into sports streaming, and will be getting some back and more. Broadband may be low-margin, but Sky has a strong and loyal customer base from to leverage, and potentially in the likes of mobile, with 5G also coming into the horizon. Ultimately this can also fuel further growth in sticky streaming revenue as it is all bundled up."
Pre-Covid, Smith has predicted that Sky shares could reach $2 within two years, with Sanzaar rights bedded in. Today, after what he calls the "black swan event" of the outbreak, and today's announcements, his new target is 55c (other analysts had ratings under review at press time).
Sky, Spark should each stick to their knitting
Jarden analyst Arie Dekker was cooler on Sky's pending foray into broadband.
"We can see the rationale for Sky wanting to move into broadband but are concerned about the limited scope for differentiation. That doesn't mean Sky can't take customers over time – like 2degrees has off its mobile base - but differentiating on price is unlikely to see any meaningful benefits for Sky for some time," Dekker told the Herald.
"And right now we would prefer to see Sky remain focused on its core business where there are material issues.
"We are concerned about Sky taking on additional start-up losses to add to the ones it is incurring in RugbyPass." (Sky bought international streaming player RugbyPass in a deal worth up to $60m and this morning said it had plans to expand the service.)
Since Simon Moutter's abrupt departure as CEO in mid-2019, Jarden has been predicting that Spark will ultimately exit sport.
Dekker - who had a neutral rating on Sky ahead of today's announcements - stuck broadly to that line this morning, saying although Spark is about to start streaming domestic cricket, "Like the other rights it has had, the investment is going to be challenging for Spark to monetise and we see limited basis on which it will deliver any meaningful benefits."
Dekker added, "Outside of a major change in industry structure, we continue to see Spark as being a minor player in this space – willing to absorb what for it are moderate start-up losses – until it isn't.
Sky updates guidance, hints at dividend return
This morning, Sky said it is raising $157 million with a deeply-discounted rights issue. New shares will be 12c - a 63.6 per cent discount on Wednesday's closing price of 33c.
Shares were in a trading halt ahead of the announcement and will remain suspended until the placement is filled.
Sky also said today that a $200m banking facility, which had been set to shrink to $150m by July next year has now been extended to July 2023, conditional on the equity raising.
Some of the proceeds from the $157m capital raise will initially be applied to pay down debt.
The $0.12 per share-placement offer will comprise of a fully underwritten $9m institutional placement and fully underwritten $148m pro-rata non-renounceable accelerated entitlement offer, at a ratio of 2.83 for 1. The underwriters are Goldman Sachs and Forsyth Barr.
Sky also offered a carrot to investors this morning, saying its board would assess the possible commencement of dividends in 2022.
In March, the company cancelled its earlier guidance for June-year revenue of $750m to $770m and earnings before interest, tax, depreciation and amortisation between $170m and $190m.
It now expects revenue of $730m to $750m and ebitda of $155m to $175m in the year ended June 30. For the following year, revenue could fall to $610m to $640m and earnings to $100m to $130m.
Sky noted that its customer numbers, including Lightbox (which it wholesales back to previous owner Spark on a bulk basis), exceeded one million at April 30, and that viewership during the lockdown month of April was about 10 per cent higher than the year before.
Streaming customers had increased by about 8.6 per cent since mid-March, but satellite subscriptions fell by 1 per cent because of the inability to connect new customers.
Advertising in April fell by $1.4m or 36 per cent from a year earlier, and ongoing reductions in advertising could be expected as covid impacts continue to be felt across the country, Sky said.
Commercial revenue fell by $3.1m, or 68 per cent, in April as pubs, clubs and hotels were shut. Sky noted that it proactively stopped charging some customers.
Expanding Rugby Pass
Sky bought RugbyPass - which owns key rugby rights for most of the world outside Super Rugby and Six Nations countries - last year in a deal worth up to $60m. It recently announced the amicable departure of RugbyPass founder and CEO Tim Martin.
RugbyPass has millions of visitors per month to its articles and highlights, but at the time of the purchase, Martin told the Herald that only around 20,000 were paying the US$15/month subscription for streaming video - although he saw scope to lift that to the single-digit millions given the number of expats and other rugby fans in countries where RugbyPass offers its full service.
However, over the quarter just gone, RugbyPass subscribers declined 1.5 per cent amid Covid-19 disruption.
Spark and Vodafone declined to comment.
Spark shares were down 0.44 per cent to $4.52 in midday trading.