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Sky TV, Vodafone plan merger to create NZ's largest telco and media group

Thursday 9th June 2016

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Sky Network Television plans to merge with the New Zealand unit of Vodafone Group to create the country's largest telecommunications and media group.

Auckland-based Sky wants to acquire all the shares in 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, to be funded through new debt, the companies said in a statement. 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.

The two companies are already in partnership offering bundled deals to consumers consisting of a Sky TV package, broadband and phone services. Sky, the country's dominant pay-TV company, has been losing subscribers on its traditional satellite-TV service as it builds up streaming video-on-demand internet services to compete with new rivals such as Netflix. For Vodafone, the country's largest mobile phone provider and second-largest broadband service, the deal gives it access to content to feed through its channels. Vodafone's local head Russell Stanners will become chief executive of the combined company, with Sky head John Fellet to become chief executive of media and content, reporting to Stanners.

"The merger brings together Sky’s leading sports and entertainment content with our extensive mobile and fixed networks, enabling customers to enjoy their favourite shows or follow their team wherever they are," Stanners said. "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.“  

Sky directors unanimously recommend its shareholders vote in favour of the deal, with a meeting expected to be held early July. The deal requires approval by shareholdings holding more than 75 percent of votes cast at the meeting.

Grant Samuel, the independent adviser and appraiser of the proposal, has concluded that “Sky TV shareholders will clearly be better off if the proposed transaction proceeds than if Sky TV continues as a standalone entity” and that “the price and terms of the share issue are fair”.

The new Sky shares to be issued to Vodafone at $5.40 apiece, representing a 21 percent premium to Sky last traded price of $4.47 and a 27 percent premium to Sky's one month volume weighted average price of $4.25 on June 7.

The combined group will be one of the largest companies on the NZX, with a forecast total revenue of $2.91 billion and earnings before interest, tax, depreciation and amortisation of $786 million for the year ending June 30, 2017.

The stronger cash flow and future savings generated by the combined group are expected to lead to increased dividends for the company, with a likely payout of between 31.9 cents and 37.5 cents in the 2017 financial year. Sky paid a 30 cent dividend in its 2015 financial year and is currently expected to pay a 29.4 cent dividend for the 2016 year and a 28.9 cent dividend for 2017, according to analyst estimates compiled by Reuters.

The merged companies are expected to generate cost and capital expenditure savings of about $415 million, or 52 cents per share, after integration costs, as they rationalise overlapping functions and use Vodafone NZ's technical and network capabilities to improve the efficiency of sales and marketing. They also expect to have access to lower cost set top boxes through the larger Vodafone Group and may reduce the amount of satellite transponder capacity required as they step up delivery of content through the internet.

They also expect to accelerate revenue growth as they cross-market services to drive penetration of traditional pay-TV and video-on-demand internet services, reduce the rate at which customers drop services, known as churn, and develop new products to drive customer growth. The combined group could generate revenue synergies of about $435 million after integration costs, or 55 cents per share. Further revenue gains could come from the "monetisation" of entertainment content on mobile devices, it said.

The deal meets Vodafone's merger and acquisition criteria, and its shares in the combined group would be subject to lock-up restrictions with restrictions on it increasing its interest above 51 percent.

The transaction is conditional on approval from the Overseas Investment Office and clearance from the Commerce Commission. Sky and Vodafone expect it to be completed around the end of 2016.

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