Sky Beats BT in Share Price Battle

BT may have acquired the rights to broadcast the UEFA League beginning in 2015, but analysts say Sky is the better value investment

Allan C. Nichols, CFA 12 November, 2013 | 9:16AM
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 BT Group (BT.A) announced over the weekend that it won all live U.K. television rights to the UEFA Champions League and UEFA Europa League games for the 2015-16 through 2018-19 seasons.

BT is paying roughly £900 million for the seasons. While we were quite surprised to see  British Sky Broadcasting (BSY) lose the rights, we are pleased to see the firm acting rationally from a finance perspective. We don't see how BT can earn enough to justify the price it paid when even BSkyB, which has much greater scale, passed on the deal.

We wonder if BT's objective was to try to force BSkyB to pay up for the rights to hurt it financially, and the firm called BT's bluff. Another possibility is that this provides BT with greater leverage in negotiations regarding wholesale deals with BSkyB. Regardless, we continue to think BT's shares are overvalued.

BSkyB has done a great job of aggregating some of the best content available and then marketing its services. More than a decade ago, the firm began to enter exclusive deals to carry major sporting events in the United Kingdom. In addition, it acquires rights to many first-run movies and U.S.-produced series, which are becoming increasingly popular in the U.K. While it resells the majority of its purchased content to other television carriers, it also produces its own shows to distinguish its product. This capability was enhanced by the completion of a new production facility in 2011.

The new building has several studios, including one that is large enough to hold an audience and produce live shows, such as game or talk shows with a live audience. As a result, BSkyB has outperformed its competitors by consistently expanding its television subscriber base. In addition, it is selling additional services, such as high-definition television, DVRs, second set-top boxes, and video on demand. All of these services increase average revenue per user and increase profitability.

The firm also offers broadband and phone service. These businesses have grown rapidly and are now similar in size to Virgin Media and Talk Talk, though they are still smaller than those of BT Group, the incumbent telephone operator. In fact, BSkyB and BT have been gaining the majority of the net new broadband subscribers in the U.K. for the past several quarters. While the firm doesn't have the scale in broadband and telephony that it has in pay TV services, the profitability in these operations is improving faster than we anticipated.

The competition in these segments is much more intense than in television, so BSkyB will never have the scale and moat in broadband and telephony that it does in television, but the incremental business is improving the firm's margins and free cash flow for now.

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Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.