Vodafone to take 51% stake in Sky merger

A merger of Sky TV [NZX: SKT] and Vodafone will create significant value for shareholders and create a leading integrated media player, say merger documents released this morning.

Under the deal, UK-based Vodafone will own 51% of a combined Sky TV and Vodafone New Zealand, which will be headed by Vodafone NZ chief executive Russell Stanners.

Sky CEO John Fellet will become head of media and content, reporting to Mr Stanners.

The transaction involves Sky paying Vodafone $1.25 billion in cash and issuing shares at $5.40 to Vodafone, valuing the New Zealand telco at $3.4 billion on a debt-free basis.

Sky shares last traded at $4.47 before a trading halt was imposed. When trading resumed this morning the stock quickly soared 20% to $5.35.

In a statement, Sky chairman Peter Macourt says the merger is a transformational strategic step.

“The transaction is also highly attractive to our shareholders. Our shares are being issued at a premium to market price and shareholders also participate in the substantial synergy benefits we expect from the transaction.”

Mr Fellet described the deal as “a significant and positive step in Sky’s evolution as a premium entertainment company.”

“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.”

Mr Stanners said the merger would allow customers to enjoy their favourite shows or sports anywhere.

“The combination with Sky will bring greater choice, enhanced viewing experiences and will better serve New Zealanders as demand for packaged television, internet and telecoms services increases.”

Together the companies will be one of the biggest companies on the NZX, with combined revenue of $2.9 billion for the year to June 2017 on a pro forma basis, and earnings before interest, tax, depreciation and amortisation of $786 million.

Value creation

The companies said the deal will generate significant savings and benefits for shareholders with a net present value of about $850 million.

Synergies include cross-marketing of services, greater penetration of subscription TV and reducing satellite capacity with the shift to fibre broadband over time.   

Customers would also have access to feature-rich, lower cost set-top boxes, the companies said.

Even without the synergy benefits free cash flow per share would be 8% higher for the combined group, they said, with the merged companies forecast to achieve 37.5c a share in 2017 on a pro forma basis compared to Sky’s forecast 34.5c.

The merged companies would aim to pay out fully imputed dividends of 80-100% of free cash flow.   

Timetable

Sky shareholders will be sent a notice of meeting an  explanatory memorandum next week. A shareholder meeting to approve the transaction will be held in early July and the deal is expected to complete towards the end of this year.

Conditions include the approval of 75% of votes at the Sky shareholder meeting, as well as clearance from the Commerce Commission and the Overseas Investment Office.

Deal structure

The transaction involves Sky issuing 405 million shares to Vodafone, while the $1.25 billion cash payment will be financed by debt, giving the combined group a pro forma net debt of $1.54 billion in the year to June 2017.

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