In a research note to clients after Spark's profit announcement yesterday, Jarden analysts Grant Lowe and Arie Dekker raised their 12-month target price from $3.42 to $4.05 (Spark shares were up 1.86 per cent to $4.85 as the market opened today) but maintained their underperform rating.
Why an underperform rating on a company that just posted a 9.2 per cent profit jump, its fastest revenue growth in three years, maintained its dividend and reaffirmed its full-year guidance?
Lowe and Dekker see the broadband market as very easy to enter in the UFB era of Chorus wholesaling and note the success of Trustpower and 2degrees, who have each grabbed around 100,000 landline broadband customers over the past few years. They also see competition for fixed wireless access (a recent cash-cow for Spark) and UFB fibre.
And, most strikingly, they also "believe Sky is increasingly motivated to enter the broadband market with its significant content portfolio and customer base potentially providing it with an opportunity to establish a meaningful market position".
It would be the ultimate reply to Spark's incursion into sport - take the fight to Spark's home turf by eating into its broadband and mobile business.
Vocus, which reported a strong result yesterday, and 2degrees are mooted by Jarden as possible partners. 2degrees is well behind Spark and Vodafone NZ in the market. Lowe and Dekker see, in their view, the prospect that "it could unravel and pave the way for its mobile network to end up being the catalyst for wholesale competition" - hinting at a previously-raised scenario where 2degrees is bought by wholesaler Chorus (a possible development previously raised by Dekker), which in turn could partner with the likes of Sky.
When asked in October about the possibility of Sky making a broadband play, and whether he was open to working with Chorus, Sky chief executive Martin Stewart told the Herald: "It's something that we've been looking at. Chorus are fantastic to work with, and there are a number of other people in the supply chain who you can work with in order to deliver a service to the customer."
He added: "I think New Zealand has a tremendous regulatory framework as regards broadband services. It's a very open environment, a very clear and transparent environment - and one that encourages competition."
This morning, Stewart restricted himself to: "We continue to look with interest."
Is the Sky boss being mischievous, or does his company have real-intent to move onto Spark's turf, as Jarden thinks?
"I know they've seriously looked at it before," long-time industry watcher Peter Wise - a former IDC NZ country manager turned principal advisor at Ecosystm - told the Herald this morning, "
"But the Broadband market is already crowded and the margins are thin. There are at least 80 broadband providers in New Zealand," Wise said.
"So I can't see it creating much value for them."
Mobile is a more attractive, higher margin business. And although Sky is pressed financially at this point, 2degrees' parent company, the Toronto-listed Trilogy, has seen its shares dive from over C$10 to a recent C$1.72, seeing its market cap cater to an easily digestable $100 million or so (Trilogy has seen three straight years of profit from its NZ business, which now includes some 1.3m mobile customers and around 100,000 landline broadband connections, but it also owns a second telco, in Bolivia, which has been hit hard by that country's political troubles).
But Wise says: "A 2degrees purchase would be risky. There's lots of investment required for 5G [2degrees is an all-Huawei shop, so also mired in the GCSB controversy] and it could still fall foul of the Commerce Commission, who denied the Vodafone/Sky merger in 2017 over concerns it would lessen competition."
Vocus Group did put its NZ business on the block, only for new management to pull it from sale in early 2018 - and a recovery in the company's fortunes since probably means the ASX-listed telco would want north of $400m these days, which could be well beyond what Sky would be willing to pay for around 204,000 customers, infrastructure and market smarts. Some kind of partnership, however, could be more likely. Afterall Vocus was the initial provider, beyond the scenes, for the first iteration of the service known as Stuff Fibre (now provisioned by a smaller ISP).
Wise also sees it "unlikely" that Chorus would take over 2degrees, then wholesale its mobile service to Sky, as Dekker posits.
"There's too much risk for Chorus, who are looking to be a long-term, low-risk utility type stock," he says.
And the government was distinctly lukewarm when recently departed Chorus chief executive Kate McKenzie raised the possibility of a Chorus wholesale 5G network - even the vague suggestion of which drew howls from Spark and Vodafone, who said Chorus playing in both mobile and landline infrastructure would dampen innvation and lessen competion between the two primary mechanisms for delivering broadband.
So whether Sky ultimately makes a move into broadband could, again, be decided as much by the regulator as strategic decisions.
Spark shares were up 1.86 per cent to $4.85 in mid-morning trading for a market cap of $8.9 billion. The stock is up 22.4 per cent over the past year.
Sky shares were down 1.0 per cent to 63c for a market cap of $279m. The stock is down 62.5 per cent over the past year.