European Media and Telecoms - Value in Premium for Sky and Mediaset
* New Vivendi deal triggers material Mediaset share price correction
A combination of the UK referendum vote and Vivendi’s decision to change its offer to buy Mediaset
Premium triggered a 23% correction in Mediaset Spa’s share price since 23rd June. However, Mediaset’s
FTA-TV assets in Italy and Spain continue to perform driven by strong H116 results (See our note here).
Meanwhile, the collapse of the Vivendi deal may create an option for Sky to reopen discussions with
Mediaset to consolidate Italian pay-TV, potentially unlocking value within Sky Italia. We note Wall Street
Italia on 3/8/16 raised the prospects of SKY-Mediaset renewing talks.
* Five possible outcomes for Italian pay-TV market exist
1) Mediaset re-takes control of Premium and loses Champions League (CL) rights at the next auction.
Mediaset funds c€200m of cumulative losses to break-even. 2) Mediaset re-takes control of Premium
and renews CL rights (c15% premium). Mediaset funds €240m of cumulative losses. 3) Sky acquires
100% of Mediaset premium outright which could generate synergies €1.3-2.7bn (assuming 10-20%
SG&A cost out). 4) Sky and Mediaset create a JV which controls all of Sky Italia and Mediaset Premium
assets; and 5) Mediaset reaches a revised agreement with Vivendi or sells to a another party.
* We think a Sky deal has benefits
FINinvest would benefit from a Sky deal via: 1) unlocking Premium value; 2) higher dividends; and, 3)
share in upside (assuming JV or equity deal with Sky). For Sky, a deal would de-risk execution, generate
synergies and unlock value; although UBS base case sees Sky Italia deliver EBIT growth without a deal.
While regulatory hurdles are likely, we view the characteristics of the Italian market makes merger
approval feasible. Timing could be influenced by the upcoming CL rights auction in spring-summer 2017.
* Valuation: Reiterate Buy Rating on Mediaset Spa and Sky
Our DCF valuation of Mediaset Premium, assuming no renewal of CL, is -€150m. Under this scenario our
Mediaset SOTP valuation would be €3.63 implying 27% upside. Our SOTP would however increase to
€4.16-4.53 assuming a sale or JV with Sky. For Sky, we view the share price reflects limited value for Italy
while growth from new initiatives (Sky Q, UK mobile launch, pan-European OTT launch) has been
underestimated. Sky trades 12.5x calendarised 2017E EPS – a trough multiple vs. a FY17-22E EPS CAGR
of 20%.