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Video services

Vodafone NZ & Sky Merge in $2.4B Deal

Vodafone New Zealand and Sky Network Television have agreed to combine their telecom and pay-TV operations in a deal valued at 3.4 billion New Zealand dollars (US$2.4 billion).

The merger will unite Vodafone New Zealand (NZ)'s telecom business with the country's largest pay-TV company and help to meet growing consumer demand for packages that bundle broadband access with premium TV content.

Vodafone claims to be the largest mobile and second-biggest fixed-broadband player in New Zealand, with about 2.35 million mobile customers and about 500,000 fixed-line connections. Sky, meanwhile, is the clear market leader in the pay-TV industry, with around 830,000 subscribers.

The two companies will hope their tie-up can better fend off competition from other network operators, including former state-owned monopoly Spark New Zealand, as well as over-the-top (OTT) video companies such as Netflix Inc. (Nasdaq: NFLX).

The merger builds on previous partnership arrangements between the players and will be led by Vodafone NZ boss Russell Stanners as CEO, with Sky Chairman John Fellet becoming CEO of media and content and chairman of the combined group.

The transaction will see Sky acquire all of the shares in Vodafone for a purchase price of about NZ$3.4 billion ($2.4 billion). Sky will then issue new shares to Vodafone at a price of $5.40 ($3.85) per share, which represents a 21% premium to Sky's closing price on June 7. Drawing on net debt facilities, Sky will also make a payment of NZ$1.25 billion ($890 million) to Vodafone.

Following the deal, Vodafone will hold a 51% stake in the combined company, which is expected to generate revenues of NZ$2.9 billion ($2.1 billion) and EBITDA of NZ$786 million ($560 million) during the financial year ending June 2017.


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However, earnings forecasts for the separate companies indicate that pressure on them is growing. Sky's revenues are expected to fall from NZ$927 million ($661 million) in the financial year ending June 2016 to NZ$920 million ($656 million) a year later, with EBITDA shrinking from NZ$336 million ($240 million) to NZ$305 million ($217 million) over the same period.

Vodafone expects to generate about NZ$2 billion ($1.42 billion) in revenues in each of those years, although is guiding for a 6% increase in EBITDA, to NZ$481 million ($343 million), over this period.

Executives say there are significant cost and revenue "synergies" between the two groups due to overlapping functions and expected cross-marketing of services in the pay-TV and OTT areas. Cost synergies carry a net present value (NPV) of about NZ$415 million ($296 million), according to a Vodafone statement, while revenue synergies are estimated to have an NPV of roughly $435 million ($310 million).

In particular, Vodafone plans to take advantage of Vodafone Group plc (NYSE: VOD)'s global scale to procure lower-cost equipment, including a cheaper set-top box.

Shares in Sky closed up 17.45% in Wellington earlier today.

News of the deal may fuel speculation that Vodafone Group is looking to do similar deals in other markets. Earlier this year the operator agreed to merge its Dutch business with that of cable operator Liberty Global Inc. (Nasdaq: LBTY). (See Vodafone, Liberty Global Form Dutch JV.)

Vodafone Group and Liberty previously held talks about a much broader European deal. (See Vodafone in Asset-Swap Talks With Liberty.)

Shares in Vodafone Group were trading down 1% in London Thursday morning at the time of publication.

— Iain Morris, Circle me on Google+ Follow me on TwitterVisit my LinkedIn profile, News Editor, Light Reading

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