Fellet makes modest purchases of Sky TV shares ahead of vote on Vodafone merger

Sky Network Television chief executive John Fellet has increased his modest holding in the pay-TV operator ahead of a special meeting of shareholders next month to vote on a merger with Vodafone Group that would create the country's largest telecommunications and media group.

Fellet bought 19,800 shares for $98,604, or $4.98 a share, on the market on June 21, lifting his total holding to 156,300. It was his second purchase in less than a week after he picked up 19,900 shares at the same price on June 15. Fellow director John Waller bought 5,000 shares on June 14 as a trustee of the Jaw No.2 Trust.

Shareholders will vote at a meeting in Auckland on July 6 on the merger proposal, which would see Sky TV acquire Vodafone NZ for $3.44 billion through the issue of new shares, giving Vodafone Europe a 51 percent share in the combined group, and cash of $1.25 billion. Sky plans to borrow $1.8 billion from Vodafone to fund the purchase, repay its existing debt and fund the working capital needs of the group after the merger.

Analysts at Morningstar said in a report yesterday that the merger would create a business with "a more strategically certain future than Sky TV as a stand-alone unit" and recommended shareholders approve the deal, although its existing model wasn't dead in the water.

Even though online video-on-demand players had made rapid inroads into the market, Sky TV remains "a highly profitable and financially robust entity" with an earnings margin forecast at 33.5 percent by 2020, from 40.9 percent in 2015, and free cash flow falling to $109 million before dividend payments from $167 million, analysts Brian Han and Benjamin Chan wrote in a report.

Han and Chan say they have long suggested Sky TV cut its prices to fend off competition. "Instead, it appears Sky has bitten on a strategic bullet of an even more audacious kind," they said. "It is aiming to secure its future and become a triple-play convergent provider, by snapping up the second-largest telecommunications entity in New Zealand - one that is the leading mobile operator with a 42 percent subscriber share and the number-two player in the fixed-line space with a 33 percent subscriber share."

The merger proposal, they say, "suggests that Sky harbours greater strategic concerns about its long-term future than our current thinking," they said.

The independent appraisal of the deal by Grant Samuel concluded that Sky TV didn't have an attractive future as a standalone pay-TV business in the longer term as it faces increased rivalry and a "fundamental deterioration" in its strategic position. Sky TV earnings are in decline as it loses subscribers on its dominant satellite-TV service and faces higher content costs because of increased rivalry from internet-based services such as Netflix. Its directors have unanimously recommended the deal.

Fellet joined Sky as chief operating officer in 1991 and was promoted to CEO and to the board a decade later. His salary package was $1.9 million last year. The 2015 report shows none of its board members held meaningful stakes in the company. Fellet held 2 million share options prior to 2005 but these were terminated as part of a scheme of arrangement for the merger with INL.

Vodafone's local head Russell Stanners has been named to lead the enlarged company, with Fellet reporting to Stanners as head of media and content.

(BusinessDesk)