SKY PLC; market cap (as of 5/12/14): £16.3bn

Introduction

On December 4th, 2014, Sky agreed to sell 80% of its betting business Sky Bet to CVC Capital Partners. The gambling division, valued ca. £800m, has been one of Sky’s fastest growing businesses with 18% revenues growth in the last financial year. However, the firm decided to fully focus its attention on the pay-TV services following the global trend of specialization, also visible across other industries.

Companies Involved

Sky PLC, formerly British Sky Broadcasting Group (until November 2014), is a holding company founded in 1990 and specialized in telecommunication in UK and Ireland and in paid broadcast services in Europe. Operating in five countries with a client base of ca. 20.8m subscribers, Sky PLC is the leading entertainment company in Europe generating revenues of £7.63bn in 2014 and employing around 31,000 people.

Sky Bet is a betting and gaming company founded in 2001 and completely owned by Sky PLC. First orientated towards sports bets, Sky Bet expanded and diversified its products offering by creating Sky Vegas, Sky Casino and Sky Bingo.

CVC Capital Partners is a private equity company founded in 1981 as the European Investment structure of Citicorp Venture Capital. With $71bn under management invested in 60 companies (such as Avolon, the Irish Aircraft leasing company, and Formula One, the British hotels chain), the fund employs 270 people.

Transaction structure

The deal is valuing Sky Bet at ca. 15x the EBITDA of the 12 months ended June 30th 2014. According to the terms of the agreement, Sky will receive £600m in cash and £120m at a later stage, with £70m coming from a vendor loan from CVC Partners and the remaining £50m being conditional on meeting the minimum investment return on transaction required by CVC. Sky will maintain ongoing board representation and a long-term brand license agreement with the gaming business, meaning it will allow to use its brand for an agreed period of time on specified conditions. The transaction also includes the website Oddschecker, which provides updated odds on sports’ bets. The deal must be cleared by UK and Irish regulators and is expected to close in Q1 2015. Shares in Sky went up 1% in early trading.

Rationale for Sky

Sky’s recent £6.9bn takeover of Sky Italia and its acquisition of 90% of Sky Deutschland illustrates the firm’s strategy to focus on its core business. Following these acquisitions, the holding company British Sky Broadcasting Group Plc. has also changed its name to Sky plc. The £600m cash inflow might be intended to grow Sky’s core broadcasting business, however, exact investments have not been specified. Possibly, the proceeds could be used to allow Sky to reduce its net debt, which has reached the level of three times its most recent earnings due to the recent acquisitions. Lastly, Sky might also choose to acquire the remainder of Sky Germany.

However, the announcement is quite surprising, since Sky Bet was perfectly identified as a growth sector by the holding company (revenue growth of 18% in 2014 with only 6% of the £3.0bn British betting market). However, by offering £720m for 80% of the shares (£600m if Sky Bet does not hit the earning target), meaning 14.4x the 2014 EBIT  (£50m EBIT in 2014). With such a high price, it seems that all that Mr. Darroch (Sky’s CEO) could do was to accept. In fact, another option could to keep the cash as a reserve for the next Premier League TV rights auction in 2015 for the 2016-2019 period and also for the Champion’s League rights in UK. Indeed, BT clearly expressed its intentions to increase its allocation of rights, which would be a serious threat to Sky’s business.

Rationale for CVC

It is not the first time CVC steps into the betting playground. In 1999, the Private Equity firm acquired William Hill, one of the largest British bookmaker introduced in 2002. In 2003, CVC acquired IG Group, a UK’s leading provider of speculative investment such as spread bets and re-floated in the LSE in 2005. In 2013, CVC even tried to acquire Betfair, the world largest Internet betting exchange company. However, the stakeholders failed to reach an agreement because of different visions for the company’s strategy after the acquisition, notably because of a management replacement matter. It seems that the Private Equity funds wants to reiterate the experience, by taking over a more mobile-orientated business this time.

CVC Partners will benefit from Sky Bet’s successful management as well as employees who will remain in the firm under the new ownership. Therefore, the partnership between CVC and Sky will allow Sky Bet to grow successfully. The business will remain headquartered in Leeds.

The UK telecommunication and media market

By selling its betting business, Sky has started responding to the fast-changing UK telecom and media market. The telecommunication and media sector has been shaken up by British Telecoms Group one more time. Indeed, BT is actually in talks with EE and O2 since is considering an acquisition in order to add a mobile business to its products offering. Such a hypothetical strategic acquisition could help BT in gaining competitive advantage and spreading the seeds of fear among competitors in the TMT industry. Indeed, following this news, the current market leaders, such as Vodafone and Sky, have started considering new strategic possibilities.

According to Nick Jones, partner at Cavendish Corporate Finance, BT’s potential acquisition of EE or O2 could be seen as the start of a significant transformation in the UK mobile telecoms market, with a number of key players planning to secure their market position through further M&A activities. Indeed, both EE and Vodafone have recently announced plans for their own broadband and TV services in the UK and last week TalkTalk also moved to strengthen its mobile business under an agreement with O2.

Financial Advisors

Sky was advised by Goldman Sachs as exclusive financial advisor and by the law firm Herbert Smith Freehills, while CVC was advised by OC&C Strategy Consultants and the law firm Freshfields Bruckhaus Deringer. The management was advised by Debevoise & Plimpton.

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