"Vulnerable" Sky's future remains cloudy in wake of Disney deal

Disney’s move to buy 21st Century Fox last month was one of the blockbuster M&A announcements of 2017.

The $52.4 billion deal would see the owner of Mickey Mouse and Star Wars join forces with a portfolio of businesses that includes film powerhouse Twentieth Century Fox and TV production house Endemol Shine.

Sky, with its 22.5 million customers in Austria, Germany, Ireland, Italy and the UK, is also part of the deal.

But what does the future for the broadband, mobile and TV provider?

Announcing the deal, Disney said the acquisition of Sky would help it to expand its international reach.

It described the company as “one of Europe’s most successful pay television and creative enterprises with innovative and high-quality direct-to-consumer platforms, resonant brands and a strong and respected leadership team”.

CCS Insight analyst Paolo Pescatore thinks Sky is “a tremendous asset” for the US company.

“It is the European pay-TV leader and a benchmark for others,” he tells European Communications.

Disney gave a hint of what was to come in August last year when it unveiled plans for its own streaming service in a bid to reach customers directly and compete with the likes of Amazon and Netflix.

As such, Pescatore thinks Sky’s experience with its online-only Now TV platform will be of interest to Disney.

But Allan Nichols, an analyst at financial consultancy Morningstar, notes: “I don’t think satellite distribution and broadband is something [Disney] are really interested in.”

Rather, it is Sky’s content that could be the jewel in its crown.

Pescatore cites exclusive relationships Sky has with Hollywood studios, exclusive sports rights such as English Premier League football and the “huge” investments it has made in original content, including drama series such as Riviera and Guerrilla.

He thinks there will be a considerable opportunity for synergies with its potential new owner.

“Disney is hugely successful in creating franchises and blockbusters, and trying to benefit from them through merchandise, advertisement and sponsorship,” Pescatore says.

Morningstar’s Nichols expects to see Sky partnering with Disney in a similar way to how it has worked with studios such as HBO on the Young Pope series or Amazon on the new series Britannia.

“We may see more working like that across borders, some movies more designed for Europe rather than US movies sold into Europe,” Nichols says.

Sky’s creation of native language shows in Germany and Italy, Nichols adds, is an example of what it might be able to do for Disney.

According to Pescatore, the acquisition may also provide Sky with added financial heft at a time when its subscriber numbers are not growing quickly enough to cover rising content costs. 

The company saw the number of individual services its customers subscribed to rise by 800,000 in the three months to September, taking its base to over 60 million, but it may have to fork out £5 billion in the EPL rights auction scheduled to take place next month.

It paid £4 billion back in 2015 but competition from BT and, potentially, the likes of Amazon and Facebook are expected to push the costs up.

Pescatore says: “Let’s be open and frank: Sky on its own is in an extremely vulnerable position.

“It doesn’t own any pipes, such as fixed and mobile infrastructure, compared to many of its rivals.”

Sky relies on BT-owned Openreach and Telefónica’s O2 for its respective broadband and mobile networks.

Its future as a Disney company is complicated by Fox’s continuing efforts to acquire the remaining 60.9 percent of Sky that it doesn’t already own.

It announced in December 2016 it would make a £11.2 billion offer for the shares.

The UK’s Competition and Markets Authority (CMA) has been tasked with advising the Government on whether to block the Fox-Sky merger on the grounds of plurality, considering that the Murdoch family owns not only a 39 percent stake in Fox but also in News Corp, publisher of titles such as the Times and the Sun.

Nichols and Pescatore agree that Disney owning Fox would be more likely to help than hinder the deal. 
A CMA spokesperson says it will take into account all relevant information in its decision, although they would not comment specifically on what impact it might have.

Sky declined to comment for this article, while Disney did not respond to a request for comment.

Sky’s future remains somewhat in the balance.

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