Sky TV might have bought Discovery NZ – whose business centres on TV channel Three and its streaming service ThreeNow – for $1.
But fund manager Octagon says the business will be worth 35c per share to its new owner – or just over $48 million, given Sky has 137.7 million shares.
Forsyth Barr retained its outperform rating on NZX-listed Sky but increased its 12-month target price from $3.20 to $3.55.
And wealth manager Jarden, which reiterated its overweight rating, lifted its target price from $3.06 to $3.15.
Sky TV rallied by 14c or 4.8% to $3.06 yesterday after the deal was announced, bucking the broader trend as the NZX50 closed down 1.0%.
In early afternoon trading today, the stock was up another 9c or 2.94% to $3.15.
The $1 price created “a low bar for value accretion”, wrote a droll Arie Dekker and Vishal Bhula for Jarden.
“Discovery has undertaken the hard work, including downsizing the of workforce [from around 300 staff to around 130 to transfer]; shutdown of [in-house] news; exit of long-term output deals; and limited own-content creation,” the pair wrote.
“Sky does not take on property lease liabilities and benefits over first 18 months from pre-paid content, helping ensure the agreed deal is free cashflow-positive.”
Forsyth Barr analysts Aaron Ibbotson and Benjamin Crozier said the Three business had a “chequered financial history” under various names.
“None of its several owners over the past 35 years have managed to turn it into a financial success. Why would it be different this time?,” the pair asked in a research note.
Their answer was similar to Jarden’s: Discovery NZ had done the hard restructuring work and the $1/no-debt deal (though they do note that various advisory and legal costs around the deal will total around $10m). Sky’s new targets through to 2028 were “realistic” based on information so far.
Ibbotson and Crozier did qualify that Sky’s market announcement was “light on detail”. Sky has promised a fuller account after the transaction closes on August 1.
And one of their research note’s zingers – “Linear TV may be in terminal decline, but as Warren Buffett put it, the last puff of a cigar butt is all profit” – might not make the broadcaster’s next PR pack.
“In industries with declining revenues, scale matters,” Octagon Asset Management chief investment officer Paul Robertshawe told the Herald.
“Other than TVNZ, where the Commerce Commission might well have had concerns, Sky is the only player with content and audience scale that has an interest in broadcast TV in New Zealand, so [is] a very logical fit.”
Sky said in a market filing that the deal would be cashflow-positive and deliver around $95m extra revenue from the get-go, and contribute at least $10m to operating earnings by 2028.
Jarden’s Dekker and Bhula said the advertising scale benefits were unproven, given it would be a larger but also fragmented audience and that the income from Three and ThreeNow would be “lower quality revenue” in that it was ad revenue that faced pressure from economic cycles and structural threats to media.
The pair see the deal adding 13c per share.
Pundits have seen Sky’s greater free-to-air reach helping it with sports broadcast rights.
Dekker and Bhula already saw the rugby rights renewal as “likely”. But even with the All Blacks rights remaining in the Sky camp, “We maintain a subdued outlook for earnings longer-term,” they wrote.
“The declining industry revenue theme is not going away, so the synergies around content and production costs are the must-haves to achieve the sustainable ebitda [earnings before interest, tax, depreciation and amortisation] of $10m,” Robertshawe said.
“From there, the combined content offer might build audience and advertising share for the group across both TV3 and the Sky channels, which would give them a bigger slice of a shrinking pie.”
Robertshawe added: “The much greater presence in BVOD [broadcast video on-demand via the ThreeNow streaming platform] is a key benefit of the deal also.”
“Previously, shareholders had given, at best, lukewarm support for a deal like this, but a price of $1 means the business has no value on a standalone basis – negative value in fact for Discovery, otherwise they wouldn’t do the deal," Robertshawe said.
Warner Bros Discovery NZ lost $138m (including a $79.5m impairment) in 2023 on $132m revenue.
Its 2024 financials are due to be released in the coming weeks, but during an appearance on Herald NOW this morning, Sky chief executive Sophie Moloney made it clear the Discovery NZ accounts would show another loss.
“You don’t get something for a dollar if it’s profitable.”
“As shareholders [Octagon holds Sky in its New Zealand Equities Fund], we like to see firm negotiation tactics from management and not overpaying for assets,” Robertshawe said.
If the combined business does grow Sky’s ebitda earnings by $10m, and programming costs are fully expensed, he said: “It’s pretty easy to value the acquisition at 35c per share for Sky.”
“That’s a big headstart in case they find some skeletons in the closet once they get the keys.”
It was also important to shareholders that Sky had confirmed it was still confident in its target of a 30 cents per share (cps) dividend in FY26, which would fulfil its promise, first made in 2023, to double its profit payout.
“Sky has been managing its own revenue decline very well since Covid, the new CFO [chief financial officer, former NZME CFO David Mackrell, who will join Sky in January] is a media company veteran also well-versed in cost management, and shareholders have been very clear about capital allocation with management and the board, so when Sophie says they have been conservative with their assumptions, I have no reason to doubt that [dividend guidance],” Robertshawe said.
Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.