SpecialSituation-RARe©Trading Sky Deutschland (SKYD GR)
BUY
SKYD GR: Eur 6.62; target: Eur 6.90
May 12, 2014
On May 12, BSkyB acknowledged that it is in preliminary discussions with 21st Century Fox to evaluate the potential acquisition of its pay-tv assets in Germany (Sky Deutschland – SKYD) and Italy (unlisted). Fox owns ~57% of SKYD, 39% of BSkyB, and 100% of Sky Italia. BSkyB also noted that under German legislation, it would be required to launch a buyout offer for the SKYD’s minorities and it would expect, subject to German minimum offer price rules, to make this offer without a premium. Under the German minimum price rules, a bid price would be the higher of the last three-month VWAP or the highest price paid by a bidder in the preceding six months to acquire target shares. On this basis, we believe that the floor for a potential SKYD bid has been set around ~€6.7 (last three month VWAP).
Unlike other cable operators in Europe, SKYD is a growth stock, whose revenue and EBITDA are forecast to grow well into 2020s on the back of improving pay-tv penetration (currently below 10%) in the German market. Presently, consensus forecasts a three-year revenue CAGR of 14% and a three-year EBITDA CAGR of ~129%. On a relative basis (PE vs revenue growth), SKYD looks undervalued and we would value it around €7.90 a share. On a DCF basis, we value SKYD at €7.50 a share. Recent precedent transactions in the European cable sector are not comparable given SKYD’s growth profile. However, we note that on EV/Sub basis, SKYD (~€1800/sub) is valued at the high end of the precedent multiple range. If we apply, the EV/Sub paid for Virgin Media by Liberty (highest in our list), we would value SKYD at around ~€8.0 a share.
Overall, we are skeptical that BSkyB will pay a control premium to SKYD minorities, at least immediately. However, should BSkyB decides to consolidate the SKY’s European operations, SKYD minorities could benefit from backend transactions (e.g. domination agreement / outright bid etc.) that are likely to be pitched at higher premiums. We estimate a risk adjusted “efficient” price of ~€6.90 assuming (i) a bid at a price of €7.90 (30% probability), (ii) bid at 3m VWAP of ~€6.7 (40% probability), and (iii) no deal and SKYD trades around ~€6.3 (30% probability). On this basis, we would buy SKYD.
FULL REPORT ATTACHED