UBS sees benefits for Sky if BT buys EE or O2

UBS has speculated that Sky could benefit if rival BT follows through with its current talks to buy O2 or EE and is forced to become less aggressive in the forthcoming Premier League rights auction.

The Swiss bank estimated that the auction, in the first quarter of 2015, will cost at least £1bn per year if BT moves for the majority of rights, which "would be a step too far" for BT if it is also potentially integrating a new mobile network acquisition.

"We think concerns about Sky losing the EPL rights are weighing on investor sentiment but we are optimistic that the outcome could be less extreme than the market fears," wrote analyst Polo Tang.

The analyst added that Sky did was "not under pressure" to follow BT and enter the mobile market as it had potetial for significant growth already in both the UK, as it benefits from growth from new initiatives such as NowTV, Adsmart, Sky Store, as well as cost and revenue synergies from the Sky Europe merger deal.

Nevertheless, Sky is anyway undertaking a UK pilot with Vodafone (VOD) to sell a jointly marketed 'quad-play' product, ie TV, broadband, fixed-line phone and mobile.

"Were this to be scaled up, this could add a new leg of growth for Sky while allowing VOD to offer a quad-play product to compete with a merged BT/O2," Tang said, with the moves towards fixed/mobile convergence increasing the strategic value of Sky.

"We see content as the biggest differentiator in a quad-play bundle and see Sky as the only scale player for content in Europe. Post the Sky Europe deal we expect Sky to move to acquire pan European rights for a longer period."

UBS has set a 12-month price target of 1,100p, with the share currently trading around 14 times 2015 calendarised earnings per share pro forma the Sky Europe deal, which is "too cheap" given the prospect of more than 20%-per-year earnings growth.

"We expect the shares to re-rate as concerns over the EPL auction ease but also as the strategic value of Sky's content in a converged environment becomes more apparent."

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