Moneyspinning mergers
Rod Oram on Vodafone and Sky’s tie-up
SKY and Vodafone NZ are classic incumbent companies. They are so big and slow they are failing to keep up with warp-speed changes in the technology, consumer behaviour and economics driving their merging markets.
Sky is long on content but short on skills to develop services over the internet. Vodafone is long on telco technology but short on content. Both are weak innovators and dull marketeers, particularly with their attempts to appeal to younger consumers.
But together we’ll be stronger and better, they promised when they announced their $3.45 billion merger on Thursday.
Investors bought in, pushing up Sky’s shares 18 per cent to $5.28, just above the price at which Vodafone is taking its 51 per cent stake in the combined business.
That, though, was a leap of faith. The two companies gave no detail as to how they would achieve the synergies underpinning the economics of the merger.
They identified revenue gains with a net present value of $435 million under broad headings such as ‘‘cross-marketing of services’’ and ‘‘drive increased penetration of subscription television’’.
They identified cost savings with an NPV of $415m under broad headings such as ‘‘rationalisation of overlapping functions’’ and ‘‘sales and marketing efficiencies’’.
Together they equate to $1.04 a share. But analysts and the wider public won’t get more information until the full merger document is released.
However, the new as yet-unnamed company will maintain the two separate brands, with John Fellet continuing to run Sky and Russell Stanners running Vodafone. The latter will also be chief executive of the new entity.
This sounds like a recipe for the two companies, with their different cultures, trying to live together to save a bit on expenses and eke out a bit more revenue.
They have yet to make the case they will deliver more to consumers and investors.
This model is underwhelming, leaving both companies struggling to maintain average revenue per user, let alone build customer numbers and loyalty.
Moreover, the fast merging markets of entertainment and telecommunications are only getting more challenging, according to PwC’s just-released Global Entertainment and Media Outlook 2016-20.
It forecast revenues would grow at only half the speed of GDP globally. The big hope remains consumers under 35 years old. In the 10 youngest markets in the world, entertainment and media revenues are forecast to grow by 8 per cent a year 2015-20, while the 10 oldest markets will grow at only 2.5 per cent.
Another big trend PwC identifies globally is the emergence of hybrid companies that are equally strong on technology and content. Apple and Netflix are two examples. Crucially they are unencumbered by massive distribution assets.
In contrast, telcos such as Vodafone and satellite broadcasters such as Sky are. They will get some relief in coming years. The further ultrafast broadband spreads, the more customers Sky can migrate to it. By the time its satellite contract expires in 2021, it will be much less dependent on such old technology.
Theoretically, Sky/Vodafone could become one of the hybrid entertainment/tech companies that are front-runners in this revolution. But doing so would take the creation of an entirely new company and culture.
That’s the only way the business could grow revenue and profits fast enough to support the doubling of debt. That’s the only way it will be able to compete against the best hybrids.
Spark shows such culture change is possible and beneficial. It is not simply a snazzier version of the old Telecom retail business. It is fundamentally a completely new business, which is stronger, more innovative and livelier.
The same issue of total reinvention also applies to the proposed merger of the Fairfax and NZME media businesses. A bit of synergy and cost cutting won’t save them from the onslaught of global giants such as Google and Facebook, or nimble local companies.
If Sky/Vodafone and Fairfax/ NZME can pull off this transformation they will survive, and the country will have a greater wealth of media and entertainment.
Spark shows such culture change is possible and beneficial.