Why Setanta's woes may not be good news for BSkyB
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Associate Editor
David Stevenson Jun 11, 2009
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BSkyB: not a buy
Ireland's economy might be having a terrible time, but on the sports field, it's been a great year.
A Six Nations rugby grand slam; the football team matching World Cup champions Italy; Irish trained-horses filling the first five places in last week's Derby; and now the country's cricketers qualifying for the Twenty20 World Cup.
So it's rather ironic that Irish sports broadcaster Setanta could now be facing its final switch-off.
So what does that mean for sport in general - and does it turn rival BSkyB (LSE: BSY) into a buy?
Setanta's rise
It all started in an Irish dance hall in West London almost 20 years ago. That's when Setanta put on a showing of the Republic of Ireland's 1990 World Cup game against Holland after both the BBC and ITV had decided not to broadcast the game in Britain.
From then, Setanta seemed to go from strength to strength. It morphed from a niche broadcaster of Irish and Gaelic sport into an international rival for Sky. And it picked up major sporting rights on the way - not just for football, but also for a cocktail of boxing, cricket, golf, horse racing and rugby union events.
Of course, that lot didn't come cheap. Setanta needed lots of money to pay for it all. But it was raking in plenty. "According to the most recently available figures, between January and November 2007, Setanta raised a staggering £274.5m from its shareholders", says Paul Kelso in The Telegraph. It also borrowed another £180m in the period. But most of this loot was assembled to pay for broadcasting rights to Premier League football.
Now those who watch this regularly – I don't – will know that it operates in a different financial universe to ordinary mortals. You don't need the exact details of the latest ludicrous transfer deal, or individual players' ridiculously over-inflated salaries that put even our parliamentarians to shame, to see that this is a huge bubble inflated by wealthy international businessmen, and TV broadcasters' cash.
But their bubble may be about to burst
Now that bubble may be about to burst. Setanta's "massive fund-raising was required to underwrite future rights commitments of £666m - excluding the £150m 2010-13 Premier League deal – and cover an annual loss of £115m", says Kelso.
But as well as that, the company also needed 1.9m subscribers to break even. And here unfortunately, it wasn't just missing the goalposts, it was struggling to hit the corner flag. Subscriber numbers got stuck in the mud at around 1.2m.
And "with investors lacking the appetite for the long haul"; football's finest refusing to cut their broadcasting fees; and rival BSkyB closing the door on a £50m last-minute rescue deal, Setanta now faces bankruptcy under a pile of unpaid bills.
The group isn't bust yet – management say they are "in the process of attempting to secure the future of the business" – but in the meantime, it has stopped taking on new subscribers. Potential customers were yesterday greeted by a message on the Irish broadcaster's website saying "Oops! Something has gone wrong..." You can say that again!
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What happens if Setanta does bite the dust?
So what happens if Setanta does bite the dust? The Premier League is said to be confident it can replace the potential fee shortfall with a deal with another broadcaster. And it's been planning for some time how it would handle a Setanta failure, having obtained guarantees from the company's shareholders which it could call in if necessary.
But as Britain's job losses mount, and fewer people have the readies to fork out on extra TV channels, replacement broadcasters could prove harder to find than football's top men think. A post-Setanta 'broadcasting rights fire sale' is hardly going to fetch much of a price.
ESPN, the next highest bidder in the rights auction, has been mentioned as a potential player, but who knows what it would now be prepared to bid. And EC rules say that no single broadcaster can enjoy a monopoly, so that rules out BSkyB.
The net effect could be very nasty for many football clubs. Words like "devastating" and "catastrophic" are being bandied about, with the future survival of some teams already in question. Several are already deeply in debt – Liverpool FC's auditors warned last week about its £350 debts, talking about "material uncertainty which may cast significant doubt upon the group's ability to continue as a going concern". That's accountant-speak for "you're nearly bust".
Why this news may not be good for BSkyB
So where does this leave BSkyB? With a major rival on the rocks, surely this can only be good news? Well, not necessarily.
Less competition could actually hurt Sky. The broadcaster is currently lobbying for UK sports broadcasting rights to be opened up for events like the Olympics or the Grand National which are kept for free channels like the BBC.
But less competition, especially in pay-TV, could hurt Sky's argument that it's a regular player in a competitive market. "Even though such a dire situation should be good news for BSkyB, it may prove too much of a good thing", says Lionel Laurent at Forbes. "Being the last man standing could tarnish its attempts to influence the competitive landscape of television". In fact, "from Sky's point of view", says Claudio Aspesi at Sanford Bernstein, "Setanta was the perfect competitor to have."
Certainly, there are plenty of reasons to like the company. BSkyB is languishing at half its price of two years ago. And its third quarter results "were the most impressive of the media sector", says Numis Securities. But it's currently trading on a price to earnings ratio of almost 14x for next year, while the forward yield is a fair but hardly compelling 4.2%. Despite Setanta's potential demise, that still isn't cheap enough to be really tempting.
A stock that we do find tempting, which operates in a not-dissimilar area, is BT (LSE: BT/). It trades on less than half the valuation of BSkyB while yielding twice as much. As we pointed out last month - BT - a buy for the bold, it's a risky play, but the potential rewards make it worth a punt for the more adventurous investor.
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