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Vocus and 2 Degrees are vertical businesses, Sky is a horizontal business, it does not want restrictions on who can use its services. A merger makes little sense.
Here are the next media mergers that make the most sense
https://www.cnbc.com/2021/05/29/medi...pyToPasteboard
no mention of Sky vocus 2 degrees.
It's more complicated then that.
Vocus and 2 Degrees operate in a market dominated by a duopoly (Spark & Vodafone). The telco/broadband market is price competitive and the margins are thin. Infrastructure costs are high and it requires significant investment to maintain a solid network.
2 Degrees has struggled in the past, it's parent company has accumulated significant debt over the years. Vocus has also struggled, and has mainly pursued a horizontal integration strategy by consolidating smaller players in the market. Most of the investment has been focused in Australia, leaving the Vocus NZ arm mostly a retail reseller business.
Sky does have the benefit of having a monopoly on pay TV. It did (and today to a small degree) generate huge content, owned significant infrastructure, and sold this all direct to the consumer. Obviously over the years, the business has deteriorated to the point where it's now just a reseller and aggregator of media content and has little to no "moat". It has broadened out to broadband but Sky is just really offering a "clip on" media service which has only moderate appeal and is not a "must have" to most people.
The point is, does it make sense to merge all these businesses? From a cost/synergy point of view, yes it does. Access to capital will also be cheaper as a combined entity. Cross sell opportunities will be compelling to customers. But most importantly it levels the playing field and enables them to compete with the duopoly above. You could argue that why doesn't Vocus and 2 Degrees just merge and not Sky. But Sky does bring significant revenue, which can then be leveraged via debt, it also does align it will Spark Sport and Vodafone still pushes VTV. Media content is important to customers, remember, people get broadband to ultimately watch media. ie it's burgers and fries here!
It's just a question of working out a fair future value of these businesses. But I think ultimately, it's getting these 3 businesses under an ownership structure that has the capacity to borrow funds cheaply offshore. Vodafone NZ was demerged from the Vodafone parent company because Infratil and Brooksfield were able to raise debt at low rates. That's the key, it's getting access to cheap money! At the moment 2 Degrees is paying 8% in junk bonds. Vocus was about to get flicked off in an IPO (and likely debt loaded) but that's been called off now that MIRA has bought them out (using cheap money from overseas). Sky, funny enough, has ZERO debt, which is just a stupid as having 8% junk bonds as it's a waste of capital and really inefficient.
BIG IS GOOD!
https://i.imgur.com/bZXYK5N.jpg
I was looking back on some of the history of Sky and 2Degrees...found this article.
One of the 'snags' that hit the last merger attempt with Vodafone was that Sky could not show that they offered the same wholesale rates to everyone. The reason they couldn't show that is because the reseller arrangement with Vodafone was on different (superior) terms to what was being offered to 2Degrees.
That is not on for deals like these where Sky TV is the dominant Pay TV provider.
If another merger is on the cards, the good news is that Sky already have a wholesale deal in place with Vodafone. I believe the terms of that deal are fair and generous to Vodafone (as this was the 'next best thing' the two companies could do when they abandoned challenging the merger decision).
So, provided Sky can show that they would still offer legitimate and standardised wholesale rates to all parties I don't think there is an issue. I doubt Spark would say too much this time round given the contracts won for Spark Sport and their wholesale NEON and Sky Sport NOW deals.
Provided Vocus also maintain their wholesale offerings for broadband/mobile then there should be no issue on that front either (not that I think this particular item would even come up as an issue).
So yeah, I think if the parties have a desire to make a bigger, more compelling NZ business....and can agree on fair valuations for each business...then a Sky-Vocus-2Degrees merger would make a huge amount of sense.
The synergies are obvious.
While I think a 2degress & Vocus combination makes total sense with massive synergies, I still struggle to see where the large synergies are for 2 degrees/vocus to purchase sky.
sky is a horizontal service company now, meaning it wants its content distributed over as many networks as possible to reach as many people as possible as every additional subscriber is almost 100% margin accretive. This is evident in it’s deals with Vodafone and spark to resell sky content, and the fact neon & skysport and rugbypass are available to anyone on basically any device with an internet connection.
(Spark Sport is in the same situation, it needs as many subscribers as possible regardless of whether they are a spark customer or not - just like lightbox did - and spark sport doesn’t really add value to spark by way of large synergies, other than the opportunity to offer a slightly discounted bundle which in some situation makes margin worse - for instance if those subscribers were going to use both products anyway at full price)
The only vertical part of the sky business is the satellite distribution system, infrastructure which is worthless to 2degrees & vocus, other than being a short term cash cow in steady decline, and even the skybox product will move to an IP based system in the not so far away future - via both internet connected skyboxes and also the skygo streaming app becoming a standalone product - bringing the “vertical” satellite business infrastructure to an end.
Having said all that, this doesn’t mean vocus and/or 2degrees won’t consider a merger. Telecom companies adding content plays are commonplace, even though they usually don’t work out in the long term. Also, If Vocus/2degrees wants to consider itself an infratil-like company that will hold seperate businesses, then buying sky now at its low valuation is a great idea (as it would be for any other investment company.
Here is a piece describing how telecom companies buying content companies is usually a bad idea (in light of the last weeks abandonment of WarnerMedia by AT&T): https://stratechery.com/2021/distribution-and-demand/
I think the thing that people seem to keep getting confuddled with is that Sky is not a content creator. Comparing Sky to AT&T selling Warner is nonsensical.
If Vocus was looking at buying or merging with a company that created content for distribution, I would agree with your points 100%. I think that would be an expensive recipe for disaster.
But that is not Sky's business. Sky is an aggregator of content and still hold a dominant position in NZ...reflected in their still-considerable FCF.
Sky has built and is maintaining many relationships with content creators so that they can continue as the preferred distribution partner. Merging with a business like that makes perfect sense for a telco. The huge CAPEX involved with creating ever more popular content doesn't factor in. Sky pay for the content they believe is compelling for their platform as an aggregator, or if the asking price gets too much they take a pass and work with someone else to distribute their content.
Sky UK have been a success offering telco services as part of their bundles. They do create more content than Sky NZ...but their primary role is also aggregator. Which is why Comcast was prepared to pay top dollar to acquire Sky.
Maybe no deal is possible between Sky, Vocus and/or 2Degrees. But we need to make sure we are comparing apples with apples when looking at changes that are happening upstream in the industry.