Thinking more about the property sale. Highly unlikely that Sky have not been presented with an offer from a developer or someone else that is compelling enough to accept. They don't need the space, and the land alone will have a certain amount of value that The Market will pay.
When, after all this time, the contact at Colliers said "no decision has been made yet" - that does seem to me that the sale has been put on pause while Jarden work with the various 'interested parties' to see if a Sky deal can be done. Otherwise, if no deal was going to be made for the property anymore I think they would have to tell us - and Colliers wouldn't be still waiting in the wings for a decision to be made.
From here, we know a few things to be true...
- Sky cannot continue in its current form. Well, technically the business can continue as a going concern and stay FCF positive for the foreseeable future, however the problem for shareholders is that the market does not rate business that simply rent content for distribution anymore. Despite Sky's continued strong underlying financial performance, the market prices the business each year as though it will be out of business in 5 years time. Even when Sky win key content deals like Discovery, Viacom, NBCUniversal, rugby, NRL, netball, cricket etc...the market shrugs and says "yeah ok, but what about in 5 years time? You probably won't be able to renew...or if you do the cost will be exorbitant..." And therefore an excessively low EBITDA multiple is given for the business. It isn't fair, and has certainly caused me a lot of consternation over the years - but it is what it is. If Sky continues as they are, no doubt they will eventually do buybacks and divvys...this will return some value to shareholders, but even though these moves will probably give somewhat of a 'bump' to quoted value, it will always be muted by the overall pessimism of how the market views Sky's current business model.
- In a connected, digitised world you must either earn off the IP or the connectivity. Shareholders like Ogg prefer the IP route (takeover by someone like Comcast, Discovery Viacom). Shareholders like me see more value in earning from connectivity (merging with Vocus, or even perhaps 2Degrees). Neither approach is right or wrong I don't think - both would increase value for Sky shareholders, it's just a matter of how much value.
I think Discovery is interested in some kind of a deal, but not Comcast or any of the other big content producers (though I stand to be corrected). It makes sense for Discovery because they just bought TV3 and are in this market...I don't really see the benefit to Comcast etc since they have no existing presence and NZ is a small market. If Discovery are in talks with Sky and Jarden, I would be surprised if it was for a takeover. I could see them doing some kind of a partnership or JV, but not sure that they need to spend half a billion dollars to acquire Sky wholly to achieve their objectives. Let's see.
A much better outcome long-term imo is for Sky to fully embrace telco. 2 Degrees may or may not be in the mix, but I would think Vocus should be the preferred option. We already get internet through them so the relationship is warm. And, depending on how a deal is constructed, I think Sky shareholders could end up doing very well.
Let's say Sky was valued at $500M (70% premium but still less than 3xEBITDA. Fair to current shareholders given the sustained low SP but also represents a reasonable valuation for Vocus). And let's just say Vocus are valued at $700M (the higher end of the valuations we have seen in the media).
If the deal was based on a shares-only settlement (no cash component) then you end up with a new entity that has ~4.36B shares outstanding listed on the NZX and ASX. Existing Sky shareholders own ~40% of the new business, and Vocus NZ owners hold the remaining ~60%.
In theory, the new business should be 'worth' $1.2B ($500M Sky + $700M Vocus NZ). However, the new entity will produce EBITDA of $200M+ next year (just on current earnings, not taking into account synergies, cost savings and future growth).
The market is highly likely going to see this move as a positive, with large growth prospects for the new Sky-Vocus entity in broadband and mobile given the superior bundles that can be offered.
Even if to start with, the market initially put a valuation based on 7xEBITDA, that would be a market cap of $1.4B. That equates to a $120M extra gain to Vocus NZ owners right away. It would also be a SP of 32.5c/share - which would be a tremendous outcome for long suffering Sky shareholders.
I actually think Mr Market could be much more enthusiastic that that. If he was, and a 9-10xEBITDA was achieved (based on material growth assumptions) then Sky would be valued at as much as $2B in the near term (with the potential to go much higher over time as earnings increase significantly from broadband and mobile).
A $2B valuation would be an extra gain of $480M to the Vocus NZ owners. It would also be a SP of 46c/share which is damn near 3 times where the SP is atm).
If the SP initially settled anywhere between, say, $1.5B - $2B it would be a fantastic outcome for all parties involved. I think this is based on reasonable assumptions.
No doubt there are risks, and it is also uncertain how the incumbents would respond to a Sky-Vocus threat...it certainly won't all be sunshine and lollipops for the new entity. However I still maintain that this is most likely the best avenue for Sky shareholders and Vocus moving forward.
Whether I am right or wrong about the end state for Sky, one thing I know for sure is we cannot remain as just a content rental business. The market places very little value on these businesses now (something I have had to learn the hard way) and Sky needs to embrace a new business model with both hands now (be that the IP or connectivity route).