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Vodafone and Sky reach NZ$3.4b deal for merged telco and media company

The merger will occur via shares and cash, for a total purchase price of NZ$3.44 billion, with the combined company forecast to make NZ$786 million EBITDA in FY17.
Written by Corinne Reichert, Contributor

Vodafone Group and Sky Network Television have announced reaching an agreement to form an integrated telecommunications and media group forecast to make NZ$2.91 billion in revenue for FY17, and earnings before interest, tax, depreciation, and amortisation (EBITDA) of NZ$786 million.

After the merger, which Sky chairman Peter Macourt called a "transformational strategic step", the combined company is also predicted to have an underlying operating free cash flow of NZ$467 million, and underlying free cash flow of NZ$298 million "prior to synergies and integration costs".

If approved by shareholders, the merger will occur via Sky acquiring all Vodafone NZ shares for a total purchase price of NZ$3.44 billion through the issue of new Sky shares, in return giving Vodafone Europe a 51 percent stake in the combined group, in addition to cash consideration of NZ$1.25 billion funded through new debt.

The combined group is predicted to have a net present value of around NZ$850 million, or NZ$1.07 per share, with all Sky directors recommending shareholders vote in favour of the merger during the meeting expected to take place early next month.

"Sky TV shareholders will clearly be better off if the proposed transaction proceeds than if Sky TV continues as a stand-alone entity," Grant Samuel, the independent adviser and appraiser, added.

The new Sky shares, to remain listed on both the New Zealand Stock Exchange (NZX) and the Australian Securities Exchange (ASX), will be issued at NZ$5.40 per share -- a 21 percent increase from Sky's last closing share price of NZ$4.47.

"This is an exciting time for the rapidly evolving communications and entertainment industries," Vodafone NZ CEO Russell Stanners said.

"The merger brings together Sky's leading sports and entertainment content with our extensive mobile and fixed networks, enabling customers to enjoy their favourite shows or follow their team wherever they are. The combination with Sky will bring greater choice, enhances viewing experiences, and will better serve New Zealanders as demand for packaged television, internet, and telecoms services increases."

Vodafone NZ is the number one mobile provider in New Zealand, with more than 2.35 million mobile connections, and the second-largest broadband provider with around 500,000 fixed-line connections. Sky is the most popular pay TV provider in the country, with more than 830,000 subscribers, although its shares have declined by 28 percent over the past year thanks to increasing competition from video-streaming services such as Netflix and Lightbox.

"This is a significant and positive step in Sky's evolution as a premium entertainment company," Sky CEO John Fellet said.

"We already enjoy an excellent partnership with Vodafone; bringing together our two highly complementary businesses is in the best interests of shareholders and customers. The combined group will offer exciting new packages with Sky's premium entertainment content, Vodafone NZ's communications, and digital services of the future."

Sky and Vodafone NZ already offer bundled deals of pay TV, broadband, and phone services to their customers. A combined entity would mean offering Sky's entertainment offerings across all smart devices on Vodafone's fixed-line and mobile networks.

The merger was first revealed on Wednesday when the pay-TV operator confirmed talks after its shares on the New Zealand Stock Exchange (NZX) were placed in a trading halt.

New Zealand telecommunications rival Spark has said it is prepared to compete with the media offerings of a combined Vodafone-Sky entity -- as it said it has been competing with the bundles offered by the two companies for years already.

"The announcement today of a proposed merger between Sky TV and Vodafone NZ is significant industry news, but ... the reality is that Spark has been competing successfully with a tightly integrated partnership between Vodafone NZ and Sky TV for a couple of years now," Spark New Zealand managing director Simon Moutter said in a statement on Thursday morning.

"Vodafone NZ has been bundling and deeply discounting Sky TV products while Sky TV actively resells Vodafone NZ broadband."

Moutter pointed out that over the past two years, Sky's customer base has declined thanks to increasing competition from Netflix, YouTube, Apple, and direct premium sports content owners, while Vodafone NZ's broadband base has grown by very little since its NZ$840 million acquisition of Telstra Clear in 2012.

"As such, we don't believe a merged Sky TV and Vodafone NZ poses a greater challenge to Spark than the existing partnership has achieved to date," Moutter said.

The Spark MD added that should the merger occur, Spark will be the only major New Zealand-based telco.

"We also note that in effect it is a proposal for a Vodafone Group reverse takeover of Sky TV, with the multinational Vodafone UK retaining a 51 percent share of the merged entity and Vodafone executives earmarked for top jobs and board appointments," Moutter said.

"Should this proposal clear the hurdles in its way, it would mean that Spark remains the only major industry player controlled from New Zealand, with 2degrees controlled out of the US, Vocus out of Australia, and Sky TV/Vodafone NZ out of the UK."

Spark in February published its financial results for the first half of FY16, reporting net earnings of NZ$158 million, up NZ$11 million from last year's NZ$147 million, on EBITDA of NZ$455 million and operating revenue of NZ$1.723 billion.

By comparison, Vodafone NZ in August posted a full-year net loss of NZ$121 million, a substantial increase from the NZ$28 million recorded for FY14. Revenue also declined, from NZ$2.05 billion to NZ$1.96 billion.

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