Initiating Credit Coverage of BSkyB

British Sky Broadcasting's finances are in fantastic shape, but there are a couple of threats to the business that limit our rating

Morningstar Credit Committee 29 September, 2010 | 6:33PM
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Morningstar is initiating credit coverage of British Sky Broadcasting (BSY) with an A- rating, putting it on par with the strongest traditional cable and satellite companies we've rated. The firm's finances are in fantastic shape. With £2.5 billion in debt and £1.3 billion in cash, net debt stands at 1.0 times EBITDA, among the lowest in the sector. BSkyB has produced consistently strong free cash flow over several years, including nearly £900 million during fiscal 2010 (ended June). None of the debt comes due over the next five years, and the firm pays only a small dividend (equal to about a third of cash flow), producing a very solid Cash Flow Cushion, especially for a telecom or cable company.

The pay-television business has proved remarkably resilient throughout the downturn in the British economy. BSkyB is the largest provider in the UK--more than twice the size of its closest competitor--a position that has enabled it to benefit disproportionately. The firm began locking up some of the best content available under exclusive licence a decade ago to build its market position, and the scale it enjoys today should enable it to continue growing profitably.

There are some threats to the business that limit our rating, however. Competition for content is growing, and regulators have attacked BSkyB's market position. Disney's ESPN recently entered the UK, winning rights to a large number of football matches, providing a toehold for the sports giant. The UK telecom regulator also recently ruled that BSkyB has to make two prime sports packages available to competitors at discounted rates, a move the firm is challenging. Finally, BSkyB's finances may soon be tied directly to those of News Corp. News Corp, which we also rate A-, has offered to acquired the 61% of the firm it doesn't already own for about £7.8 billion.

Read Introducing Morningstar's Corporate Credit Ratings for more information on our methodology.

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