Sky’s move to weigh MediaWorks not the first

New Zealand’s Sky Network Television has considered an acquisition of MediaWorks numerous times in the past, but had always been deterred by its loss making television arm. Picture: Greg Bowker/AFP

New Zealand’s Sky Network Television has considered an acquisition of MediaWorks numerous times in the past but had always been deterred by its loss making television arm and preferred a target in the technology space.

The MediaWorks television unit was sold to US-based broadcaster Discovery in 2020 for a reported $NZ20m and now New Zealand pay TV provider Sky remains in exclusive negotiations to buy the rest of the business, which comprises of radio stations and an outdoor advertising arm.

Industry sources on Tuesday were scratching their heads as to how Sky would fund the deal, given that its market value is only $NZ432m and analysts gave a harsh appraisal, with Morningstar saying it was “perplexed” by Sky’s interest, saying whether the deal would improve returns was “highly debatable”.

In the past, it has been digital businesses that have been at the top of its agenda to take it into the future, not MediaWorks.

Shares in the Australia and New Zealand-listed Sky fell more than 7 per cent as investors reacted to the news.

MediaWorks generates about $NZ40m of annual earnings before interest, tax, depreciation and amortisation, which assumes a deal would likely value the business at up to $NZ400m.

Sky told the market on Tuesday that while it was in exclusive talks to buy MediaWorks, it would not require an equity raising to fund a transaction but would need approval from shareholders.

Based on that, expectations are that either one or both of the MediaWorks owners, Australia-based Quadrant Private Equity and US-based buyout fund Oaktree, will continue to have some holding in the merged entity in what will be a cash and scrip transaction.

The deal raises big questions for Sky when it comes to strategy.

Most pay television providers like Foxtel, 65 per cent owned by NewsCorp, publisher of The Australian, are pivoting towards the digital market in search for media growth rather than traditional forms of media that are losing advertising dollars to technology giants like Google, Facebook and Apple.

Sky only started to pivot towards streaming content in 2018, although has not had the same audience reach as other countries.

A challenge for Sky is that New Zealand is a small market where the New Zealand Commerce Commission takes a dim view on consolidation.

It is worth remembering that Sky tried to merge with Vodafone in 2017 but the transaction was blocked by the New Zealand Commerce Commission.

DataRoom understands that the New Zealand telecommunications provider Spark held talks with Sky about a transaction almost a year ago as it underwent a strategic review through Jarden and at least one Australian private equity firm made an offer but was rebuffed.

The New Zealand-listed Sky Network Television underwent a recapitalisation in 2020 and around that time, a number of suitors were understood to have lined up to weigh an acquisition of the business, including private equity firms Apollo Global Management and Atairos, headed by former Comcast executive Alex Evans.

Telecommunications conglomerate Comcast, which owns Britain’s Sky Group and NBC Universal, is understood to have made approaches to buy the business in the past as part of an extension to its Sky business in Britain.

Benefits of buying MediaWorks could be a marketing platform for Sky and cost savings and earnings growth from market consolidation.

Helping Sky from a financial perspective has been the sale of its Auckland in March for $NZ56m.

For the six months to December, Sky reported a 4.1 per cent lift in revenue to $NZ371.7m as Sky Box revenue continued to stabilise and streaming revenue grew, with streaming revenue increasing 34 per cent.

Net profit after tax for the six months was NZ28.3m compared to $NZ39.6m in the previous corresponding period and Sky says it is on track to deliver EBITDA of NZ$150m and $NZ160m for the year and NPAT of $NZ40m to $NZ48m.

MediaWorks, run by Cam Wallace, operates nine national radio brands, 12 websites and one locally operated radio station.

These include stations such as The Breeze, The Edge and The Rock.

Quadrant gained its 40 per cent interest in the business through the acquisition of out-of-home advertising company QMS in 2018 for $571.6m.

A float of MediaWorks has been on the cards through UBS and Jarden.

Meanwhile, the television arm of MediaWorks, which was spun out in 2020 and sold to Discovery, is said to be now performing strongly.