The Bundesliga and Sky Deutschland- 1 / The English Premier League and BSKYB – 0

26th May 2013

Bayern Munich may have beaten Borrussia Dortmund 2-1 with Arjen Robbin scoring in the last few minutes of the Champion League final at Wembley this weekend,  but Barry Norris, Co-Founder and Fund Manager at Argonaut Capital finds another reason why investors with an interest in football should be looking to Germany in this note below. (Argonaut Capital invest in Sky Deutschland and not BSKYB)

The start of the 2013/14 season will see Sky Deutschland begin a new four year contract, this time with exclusive rights to show all Bundesliga games for €1.95bn (€486bn per annum). At the same time BSKYB began a new three year contract to show 116 live English Premiership games for £2.28bn (£760m per annum) with BT also paying £738m (£246m per annum) to broadcast 38 live games. In other words the total cost of Bundesliga rights at €486bn per annum (£415m) is only 41% of the cost of the English Premiership’s rights at £1bn per annum1. No one would claim that the Bundesliga is less than half as good in terms of quality.

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The cost of Bundesliga rights in fact reflects the benign competitive environment for premium TV content in Germany where in contrast to the UK the cable and telecom companies have little interest in offering content in addition to distribution. As a result Sky Deutschland has secured exclusive rights for a relatively inexpensive cost which the cable companies are happy to distribute.  This lack of competition reflects a historic lack of success in monetising the value of football rights (Premiere which “won” the rights in 2000 subsequently went bust; Unity which “won” in 2004 saw the other cable companies refuse to distribute the product). This has resulted in a high degree of scepticism that the premium Pay-TV model will ever work in Germany.

Even today Sky Deutschland has just 3.3m subscribers out of a possible 42m TV homes in Germany and Austria (8% penetration). This is in contrast to the UK where BSKYB has 10.2m subscribers out of a possible 28m TV homes (36% penetration).So why will Sky Deutschland succeed when its predecessors have failed?

Because its now majority shareholder (NewsCorp) has brought management know-how which was previously absent and a balance sheet able to sustain the necessary level ofpremium content, technological and marketing investment to attract and retain subscribers: the company has unrivalled content (Bundesliga, HBO, Sky Atlantic, Sky Sports News, Formula 1); there is high evidence of consumer satisfaction with customer churn falling from 27% in 2008 to 10%; ARPU’s (Average Revenue Per User) are increasing with only 10% of customers taking the basic package with HD, SKY+ and multi-room all having  impressive levels of penetration2. All of this together with the Bundesliga momentum could turn Sky into a “must have” German consumer product.

Sky Deutschland is not an investment without risk: its current 3.3m subscribers do not generate enough revenue to cover its largely fixed cost base. But the fixed cost base means that every net new subscriber brings additional revenue with negligible incremental costs. Management currently forecast the company to break even at the EBITDA level in 2013 with 3.5m subscribers by year end. We think that the market underappreciates the value of this incremental subscriber growth at Sky Deutschland.Our sensitivity analysis suggests that if the company were to achieve 5m subscribers it would make €400m of net profit; if it were ever to achieve 10m subscribers (as with BSKYB in the UK) it would make c. €2bn of net profit. To see the potential of the investment these figures should be compared to Sky Deutschland’s current market value of just €4.5bn (plus net debt of €300m) and the current market value of BSKYB in the UK of £12.3bn (€14.4bn) (plus net debt of £1.7bn (€1.9bn))3. Whilst a German club is certain to win at Wembley on Saturday; Sky winning in Germany could be a better bet.

 

May 2013

 

1Source: Morgan Stanley/Argonaut Capital Partners, May 2013
2Source: BSKYB & Sky Deutschland, Annual/Quarterly Reports
3Source: Argonaut Capital Partners, May 2013

24 thoughts on “The Bundesliga and Sky Deutschland- 1 / The English Premier League and BSKYB – 0”

  1. Jim M. says:

    Hi Shaun and welcome back,

    I rather suspect that only property-owning Londoners will be able to afford seats at Premiership matches, and would you kindly keep the thieving sob’s from the BoE away from my beloved Upton Park!

    That pretty graph seems to suggest that the notion of local authorities making a dent in the housing problem is just so last century, although I should add that the use of a term like “suggests” hardly inspires confidence in the veracity of any conclusions drawn from these figures.

    Nonetheless, and as you rightly point out, hopefully somebody is building something somewhere which can only be a good thing!

    Popcorn and a win for Andy Murray… that’s what the country needs after the World Cup gave us such a poor return on investment!

    1. Anonymous says:

      That will be popcorn then ,,,,,,
      Welcome back Shaun.

  2. Anonymous says:

    It is great to see you back in such fine form, Shaun, after a much-deserved holiday.

    Canadian housing completions were 215 thousand for 2012 and 188 thousand for 2013 for a smaller population and economy. I had wondered why the ONS pilot estimates for an owner-occupied housing series based on net acquisitions didn’t show bigger differences from the corresponding rental equivalence series, as the comparable analytical series for Canada do. I wondered if there was a problem with the ONS weights. While I still wish that the weights were better explained, it now seems that a large part of the explanation is simply that construction activity, as you say, isn’t that strong in the UK.

    The other difference would be that the net acquisitions weights for the Canadian series reflected house expenditures (dwelling and lot), not just dwelling expenditures. I would hope that when ONS publishes its quarterly indexes in September it will publish two sets of estimates, including and excluding lot values from the weights. I really don’t understand Eurostat’s rationale for excluding lot values. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      The comparison in terms of house building between the old parish of Mark Carney and the new one is quite striking isn’t it? The 1970’s were far from a golden era for the UK economy but we did at least build more houses back then.

      By lot values do you mean the land ones?

      1. Anonymous says:

        Sorry, Shaun, by “lot value” I just mean “land value”. I usually say “lot” myself, but StatCan also uses the word “land” most often. The Canadian new housing price indexes are published for house only, land only and total (house and land). When I think of “land”, I think of something that just sits there, but when I think of a “lot”, I think of something that can be improved or that can deteriorate, much like a residence. That’s why I prefer the word “lot”, but maybe using it just impedes understanding by most people.
        Of course you are right that whatever its flaws the quarterly index to be published in September will be far more appropriate for use by the Bank of England than the CPIH.

  3. dutch says:

    With everything going so swimmingly,why are taxpayers still subsidising the activity of the banks?

    Surely,with HPI back to 2007 levels,there’s no such thing as a loss making loan?RBS must be making mega profits and we can sell at a profit………

    1. Anonymous says:

      Hi Dutch

      That is a good question but is an unanswered one. I note that the Bank of England’s Andy Haldane said earlier today that forcing people to take more risk was part of the strategy of central bankers. Perhaps that includes taxpayers!

      As to RBS it was very accident prone and I fear that there are more icebergs for it to hit.

  4. dutch says:

    I heard a theory the other day that banks had taken the oppurtunity to expand BTL over the last five years so that they could load liabilites onto people with equity,good jobs and pensions.

    Makes a lot of sense really.

    PS If you think London housing is in a bubble,don’t go checking the stats for NYSE margin debt.

    http://www.advisorperspectives.com/dshort/updates/NYSE-Margin-Debt-and-the-SPX.php

  5. Robin B says:

    Shaun, thanks for your interesting article.

    The picture on house building seems rather contradictory. Comparing the ONS construction industry stats for Q1 2014 and Q1 2013 shows a rise in new housing output of 25% (6.07bn:4.85bn). The rest of the industry was either flat or declined slightly, so overall construction growth was 6%. So someone has been building more new houses (or maybe more expensive ones). The Q2 2014 figures aren’t due for a good while yet, so it’s hard to know if this trend is continuing. The PMI surveys suggest it might be,

    1. Anonymous says:

      Hi Robin B

      Thanks for the numbers. Sadly they illustrate something very familiar which is that almost every economic topic has several series of numbers which rarely tell us the same thing! In many ways this is a particular disappointment as houses are a substantial object which are hard to conceal so we should in the modern era have very accurate numbers.

      It was not so long ago that the construction figures for the first quarter of 2014 were revised upwards and now we seem to fear that they are struggling…

    2. Paul C says:

      Yes, an interesting perspective, how many houses are there when you count them by money. Is it a refurb of a Victorian detached home or 20 rabit hutch flats in a conversion. The House builders like margin just like the motor nanufacturers, all the car companies drool at the RangeRover sports, I saw 4 of them on a transporter on my commute this morning, that is 4 vehicles selling at circa £65K each. I reckon if they are building homes today they are cotswold executive parks of detached landscaped ones at £650K. The homes they are selling in volume are the ones built in 2008 that have lain empty for 5 years, built to the lowest standard with the poorest materials, but now of course commanding £190K. So getting to the truth is as ever difficult. Are we building and how many for how much …. difficult to say.

  6. Jimbob says:

    Hi Shaun

    I read recently that George Osbournes 2011 budget report forecast roughly a doubling of tax revenue from stamp duty by 2016 (which I believe to be correct). So the govt was forecasting a property boom, and provided the tools to the banks to fulfil the forecast.

    I am in construction, more specifically housing, and there are clearly more sites in progress now, but the industry cannot cope with 20% year on year house starts. There simply isn’t the capacity with 7yrs of companies going bust, plants closing down, and most importantly 7yrs of tradesmen retiring. There have been virtually no apprentices since 2007, and it takes 5yrs+ to really learn a trade. Supply and demand will push construction costs up very quickly. Potentially good for my company in the short term, but I can’t see it being sustainable.

    1. Anonymous says:

      The quick dirty solution is to import lots of Eastern European tradesmen. The German solution is to avoid house speculation, keep the economy steady and train lots of apprentices.

    2. Paul C says:

      Hi Jimbob,
      I recognise all of the symptoms of which you speak. It is impossible to see anything but rampant inflation in trade labour costs and materials too for the UK. Factory-finished housing is the only answer left but with it being viewed in such hatred by the prospective buyer, planners, grey rinse, Nimbies, local government, central govt and everyone else except the destitute I cannot see it anytime soon.
      Paul

  7. shrimpers says:

    Hi Anteos, yes the old Granny sob story will be reeled out not least by the MPs you mention, however, whether it was via straightforward land tax or redesigned bands/charges for council tax (basically unch in England since inception), the asset rich, cash poor could realise the cumulative sums in the legacy sale of property

  8. Anonymous says:

    Allow cooperatives to group together and build off-plan for coop members (people aspiring to own their own city apartment). This matches supply to demand, with buyers pre-signed reduces financing blocks and bypasses existing housebuilders who profit from undersupply.

  9. Anonymous says:

    Says it all really – 37% of the “wealth” in the UK is housing. Housing has tripled since 1997 so without printing via housing the UK would be 27% down, or more likely it would be richer in reality because riding house prices mis-allocate capital.

  10. Patrick, London says:

    Do you have a link to the “33% of mps” stat… ieally with a party breakdown?

  11. Noo 2 Economics says:

    “What we should be doing is forcing house builders to build” – yes that would be in the flood plains where they should never have been given permission to build in the first place.

    The UK is overpopulated and it’s population should be managed down with building on green sites banned although regeneration of brown sites should be allowed.

  12. anteos says:

    sorry I can’t give a breakdown, a quick search brings up:

    http://www.theguardian.com/commentisfree/2013/jul/17/when-we-pay-rent-to-our-mps

  13. Noo 2 Economics says:

    which would leave them looking for a new cheaper property in a strange area from that in which they have presumably lived most of their lives and within a community where they were known and knew others and they were comfortable with.

    Then they just have to look to make new friends in the new area in their old age where they find themselves increasingly isolated through infirmity and an increasing inability to go out and meet people – some society!

  14. Seasiders says:

    Don’t quite understand your reply tbh, I suggested that council tax could be deducted from legacy sale ie post mortem

  15. Seasiders says:

    Also Noo I was really criticising MPs who always use excuses, in this case emotional images, to avert taxing wealth as opposed to income

  16. Noo 2 Economics says:

    sorry, misunderstood your suggestion.

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