https://www.nzherald.co.nz/business/sky-tv-a-winner-or-loser-from...

https://www.nzherald.co.nz/business/sky-tv-a-winner-or-loser-from-silver-lake-nz-rugby-deal/OQKIITASSGLDE54DNF4ONZ7GLE/

Behind a paywall, but some commentary from 'expert' analysts with regards to SilverLake reportedly on the verge of taking a 15% stake in NZR. I won't share the whole article, but here are. couple of interesting excerpts:

Jarden research head Arie Dekker said that while NZ Rugby had been more open to new platforms in recent times - witness its decision, as a Sanzaar member, to hand 2019 Rugby World Cup rights to Spark Sport - overall its tight finances have limited its appetite to take too many risks with new partners or new content-delivery technologies. A substantial injection of funds from Silver Lake could make it more adventurous.

"The negotiating leverage between Sky and NZ Rugby for programming rights turned in NZ Rugby's favour with the onset of more credible competition for NZ Rugby's rights," Dekker told the Herald.

"But NZ Rugby has remained somewhat constrained in its ability to take risks – something linked to the strength of its capital base. Were a deal completed that strengthened NZ Rugby's capital base – like one potentially mooted with Silver Lake – then we think that would turn things further in NZ Rugby's favour.

"For example, a greater risk appetite to consider a direct-to-consumer offering in the future would be a major issue for Sky."

Meanwhile, Craigs Investment Partners' senior analyst Wade Gardiner saw the deal as undermining the RugbyPass streaming service - Sky TV's vehicle for selling rugby content to an international audience.

"It's hard to see how a Rugby Union-SilverLake combination is positive for Sky," Gardner told clients this morning.

"Sky has a limited audience to monetise its local content rights" Gardiner said. And now, "It's difficult to see how Sky's Rugby Pass fits into the picture given the likelihood Silver Lake will have its own distribution plans ... Sky looks like a tricky investment at this juncture."

My thoughts:

Of course, the doom and gloom speculation of worst case scenario events are indeed possible. But, as an investor, I have to ask myself are they probable? Is it likely that SilverLake buying into NZR will lead to Sky TV (or Spark for that matter) being cut out of the equation as they go direct?

What the experts seem to continually fail to consider is the economics at play. Let's take a closer look.

Sky TV are reported to pay NZR between NZ$80M-$100M a year for the latest rights. Sky will cut a cheque of up to $100M each year for the next 5 years and take on the cost of marketing and broadcasting the events as well as actually filming the rugby matches in New Zealand.

SilverLake would only own 15% of NZR - so they will bring ideas and possibly tech to the business, however the 85% NZR owner still needs to make sure that whatever they do they are maximising commercial return.

If they go it alone, they have to factor in the costs of marketing, broadcasting and filming local live matches. Given Sky currently just cut a cheque for up to $100M, then for it to just break even with that they have with Sky (given the extra costs they would incur), they probably need to generate $120M of revenue. At least - I think this is being generous.

But let's go with $120M for some back of the envelope analysis.

Rural customers are out, so they have to rely on metropolitan areas for their main customer base. And even though NZ loves rugby, they will need to convince a lot of households to sign up to their rugby-only product.

For a rugby-only product, most kiwis who would subscribe might be prepared to pay $19.99 per month to watch Super Rugby and All Blacks. That means they have to get 500,000 subs just to equal the deal they currently have with Sky. Good luck with that, sounds like a Tui ad to me. I think Sky have pulled in audiences of around 500k for big games like Bledisloe. So the new guys would have to do better than Sky have ever managed to do before even though Sky have the deepest penetration possible in NZ given satellite is available everywhere.

If they can charge $25/month then they still need 400,000 subs just to break even.

Getting that amount of subs for a single sport offering would be hard, and the kiwi sports fans would be getting a bum deal as now they would have to pay Sky + Spark + SilverLake OTT to get all of the sports they used to get from Sky for $30/month.

Of, course, anything is possible in this changing market, but it baffles me how these so-called experts continually extrapolate the worst-case outcome for Sky. They have been doing this in earnest for years and, so far, most of their predictions have not come close to being true from a business performance perspective.

It is this constant doom and gloom sentiment that is keeping the SP at less than half intrinsic value.