A Sky TV/Vodafone merger means consumers will be offered a ‘quad' play

The proposed merger between Sky TV [NZX: SKT] and Vodafone NZ has "significant potential" for expanding  current triple play offerings – fixed line voice, fixed-line broadband, and pay television services–- into a quad-play by adding mobile, the parties say.

Sky TV chief executive John Fellet, who will be the head of media and content in the merged group, said New Zealand's triple play was under-penetrated relative to other markets and there is an opportunity for a brand new "quad" play.

"We're seeing more and more customers wanting premium content on mobile," he said.

Vodafone has the country's largest mobile base with over 2.35 million connections and draws 60% of revenue from mobile.

Under the transaction unveiled today, Sky TV would acquire all the shares in Vodafone NZ for $3.44 billion in shares and cash, giving Vodafone Europe 51% of the merged group – effectively a reverse takeover. Vodafone Europe, which has had its New Zealand operation up for sale, will also get cash of $1.25 billion to be funded through new debt while Sky plans to borrow $1.8 billion from Vodafone to fund the purchase.

The merger will allow the two companies to strip out costs while continuing to offer bundled packages against offerings from Spark and its Lightbox service. They're claiming combined synergy benefits of $850 million at net present value or $1.07 per share. That includes being able to access lower-cost set-top boxes through the larger Vodafone Group at discounts Fellet said he could only "dream of."

The two companies have worked in partnership together for the past 10 years offering bundled deals to consumers consisting of a Sky TV package, broadband and phone services.

Mr Fellet said the opportunities in the past have fallen into three piles – one where Vodafone benefited but it wasn't such as value driver for Sky, one where Sky TV beneftted and Vodafone didn't get so much, and one that hit the middle ground.

"We can now attack all three piles."

Sky TV chairman Peter Macourt said the two businesses were largely complementary and he didn't see any problems getting the required Commerce Commission approval. The deal will be put before Sky shareholders in early July and is expected to be completed by year's end.

Macourt said Sky had retained Citibank to advise on a range of options and the merger was the one that was thought to be most accretive for shareholders and the most exciting opportunity for the company.

Vodafone local head Russell Stanners, who will be chief executive of the combined group, said the two brands will be retained and both will continue to wholesale services to other parties.

Internet NZ called on both companies to commit to "network neutrality," which would mean anyone can buy the company's content and get the same service.

Mr Stanners confirmed customers will still be able to access Sky without having to be a Vodafone customer and vice versa while Sky will continue to sell content to other ISPs. "There will be no exclusive deals."

When asked if that included Spark, Mr Fellett said, "I've been trying to sell to them for five years."

Analysts at UBS said the most obvious potential benefits were from reducing telecom customer churn and stronger internet TV penetration while a key challenge was the potential cannibalisation of Sky's high TV market penetration which is currently around 50%.

"The potential bundling of exclusive content by the enlarged group may also prompt more heavy-handed regulation," UBS said. "It will also probably prompt a competitive response from Spark, especially around future digital rights for key sports content."

Spark NZ managing director Simon Moutter said his company already "competes hard" with Vodafone but doesn't see itself going head-to-head with Sky TV. He sees the real competition is with global players such as Netflix, YouTube, and Apple or with direct-to-consumer premium sports content owners.

Sky TV has a  satellite deal until 2021 and will continue to offer that to customers over that time but Mr Fellet said one of the deal's advantages was Vodafone's experience in ultra-fast broadband and there are plans to roll out an internet-only package to homeowners.

Sky's stock has jumped 19% today to a month-high $5.30, which is still below the $5.40 price at which Vodafone will be issued shares in the combined company. Spark shares have fallen 3.6%  to $3.36, the lowest since late February.

(BusinessDesk)