Market Insight

Vodafone NZ and Sky Network TV strike merger agreement

June 13, 2016  | Subscribers Only

Seth Wallis-Jones Seth Wallis-Jones Principal Analyst, Telecommunications, IHS Markit

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Vodafone has agreed to merge its New Zealand unit with Sky Network Television. The pay TV company will acquire Vodafone NZ in a reverse transaction for an enterprise value of NZ$3.4 billion ($2.4 billion) comprising a cash payment of NZ$1.25 billion and issuing new Sky shares that give Vodafone a 51% interest in the company. 

The deal is expected to deliver synergies of NZ$850 million with combined group forecast pro-forma revenue of NZ$2,914 million, underlying EBITDA of NZ$786 million, underlying Operating Free Cash Flow of NZ$467 million and underlying Free Cash Flow ofNZ$298 million prior to synergies and integration.

Shareholder approval will be sought at a meeting in July requiring approval from 75% of shareholders. 

Sky has long dominated the pay TV business in New Zealand but Vodafone has gradually been building share. The combined business would account for 97% of pay TV subscriptions. 

The deal would make the combined entity the dominant player in New Zealand’s pay TV, and mobile markets with a strong second place in the fixed broadband. 

Our analysis

Vodafone and Sky have a long history of cross marketing products.Sky customers are able to request bundled broadband through Sky at a $10 discount on the core subscription while Vodafone managed the installation and billing. Sky leads the pay TV market with a total penetration of 48% of households (860,000 subscriptions including free-to-air and OTT services) but the core pay TV satellite based service has been threatened by the risk from the growth of ultra-fast broadband overlaid with over-the-top subscription video-on-demand (SVoD) services. 

In response to the growing potential for online OTT video over fast broadband, Sky has launched a number of OTT products, Neon, which combines free-to-air channels with options including low cost channel bundles and on-demand content, the FanPass sports streaming subscription service, and Sky Go, an online streaming service for Sky content.

Vodafone New Zealand has been gaining some ground in the TV market but its offerings are dominated by Sky products which are marketed. The only non-Sky based options from Vodafone are based on Freeview products which come bundled with a set top box recorder and enabled pay-per-view films. 

While the two businesses have closely co-operated in the past, this merger will formalise the relationship and simplify the structure for delivering fully converged services. While New Zealand is a small market making it difficult to sustain high numbers of competitors, this will increase the potential for Vodafone to extend its strong position in mobile and competitive position in the broadband market. 

New Zealand
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