SKT Sky Network Television Limited.

[Balance]

Yes a lot of merit to your thought process.

If they are angling for M&A (which I think is right for Sky long term) then making the moves they are currently making to lift the SP is exactly the right approach. Foxtel have been doing exactly the same thing so that they can maximise their IPO valuation.

If I was an interested party (be it PE, a telco, Foxtel etc) I would want to make a compelling offer to buy Sky before they do any form of capital distribution to shareholders.

Turning around any company is a hard task and most company directors & management simply do not have the energy or time & resources to effect turnarounds unless they can get a company really really cheap.

More so especially in a pandemic environment so it is not surprising to me that Sky was not an attractive acquisition or merger candidate while it was struggling to get traction.

And the fact that Sky turned down a $2.30 offer reinforces what I believe that the directors of Sky felt - it was too cheap a price.

Now is when the real interest will begin with momentum on Sky's side.

[LoungeLizzard]

If Balance is right, a takeover or merger just a few months after Ogg bailed would probably...break him...

Poor Ogg - that $100k he made will get swallowed up in therapy...

Agreed- more than ever, SKY is likely to be an M&A target now that it is a profitable company again with a clean balance sheet. And whoever interested is likely to make an offer before the capital return to investors. No downside either way to investors whether an M&A goes ahead or not - Sp will be $3 come February, or a takeover offer will be in the region of $4.

[mistaTea]

Poor Ogg - that $100k he made will get swallowed up in therapy...

Agreed- more than ever, SKY is likely to be an M&A target now that it is a profitable company again with a clean balance sheet. And whoever interested is likely to make an offer before the capital return to investors. No downside either way to investors whether an M&A goes ahead or not - Sp will be $3 come February, or a takeover offer will be in the region of $4.

Yes, takeover would really need to be in the $4 region now - a 50% premium to the current SP which is 'usually' the top end I believe. Though sometimes organisations could go a little higher if they see big value.

$4/share would be a market cap of $700M, but an EV of only $580M by March (if my FCF assumptions are correct, and Sky hold $120M by then).

$580M represents a PE multiple of 14.5 based on low range GAAP earnings. The PE is only 12 if we used top end guidance (48M).

For the right company, nabbing Sky for a PE of 12-14 is not bad going at all - while still enabling existing shareholders to realise a 'fair value'.

[curious zebra]

Based on cash available to them in March, I predict a buyback (or tax-free capital distribution) in the order of $50M-$75M in March, with a $20M Final dividend in October.

In your opinion, what would be the best result for shareholders - a capital return or share buyback?

[mistaTea]

In your opinion, what would be the best result for shareholders - a capital return or share buyback?

It really depends on what the SP is.

If the SP is sub $3 then an on market buyback is probably still the way to go (a no-brainer). Ultimately it depends on what you think Sky is worth. If The Board think Sky is worth $4/share then they should be happy to continue buying back stock even if the SP lifted to $3.50.

But if the SP got to a level where they thought they would be buying back stock at or above intrinsic value, then a tax free capital return could look better.

This is what they are getting advice on.

But while the SP has come up, it is still low relative to the business prospects. So I am picking a sizeable buyback.

[mikelee]

Wow, SKY moving into my neighbourhood in the CBD! Might bump into Sophie during lunch break then.

[curious zebra]

It really depends on what the SP is.

If the SP is sub $3 then an on market buyback is probably still the way to go (a no-brainer). Ultimately it depends on what you think Sky is worth. If The Board think Sky is worth $4/share then they should be happy to continue buying back stock even if the SP lifted to $3.50.

But if the SP got to a level where they thought they would be buying back stock at or above intrinsic value, then a tax free capital return could look better.

This is what they are getting advice on.

But while the SP has come up, it is still low relative to the business prospects. So I am picking a sizeable buyback.

I'm assuming Sky, or any other company for that matter, can't force shareholders to take part in a buyback, so technically, if they pitched their buyback price too low, there might be nobody inclined to take part. Are they likely to make it above market price?
And surely, it's not a good look for them to have done that ridiculous capital raise at the equivalent of $1.20 ps, then, less than 2 years later, be offering to buy back those same shares at more than double the price?
I would have thought simply distributing the proceeds from a sale that hadn't happened, and wasn't looking likely to happen back in early 2020, [but has happened now] would be a better 'look' for the Board, don't you think?

[Sideshow Bob]

I'm assuming Sky, or any other company for that matter, can't force shareholders to take part in a buyback, so technically, if they pitched their buyback price too low, there might be nobody inclined to take part. Are they likely to make it above market price?
And surely, it's not a good look for them to have done that ridiculous capital raise at the equivalent of $1.20 ps, then, less than 2 years later, be offering to buy back those same shares at more than double the price?
I would have thought simply distributing the proceeds from a sale that hadn't happened, and wasn't looking likely to happen back in early 2020, [but has happened now] would be a better 'look' for the Board, don't you think?

The company would buy the shares themselves with the company's cash and then cancel them.

Shareholders don't need to do anything. Company would do this if they saw the shares as under-valued, and can be a tax-efficient way of capital return.

[LaserEyeKiwi]

Yes, takeover would really need to be in the $4 region now - a 50% premium to the current SP which is 'usually' the top end I believe. Though sometimes organisations could go a little higher if they see big value.

$4/share would be a market cap of $700M, but an EV of only $580M by March (if my FCF assumptions are correct, and Sky hold $120M by then).

$580M represents a PE multiple of 14.5 based on low range GAAP earnings. The PE is only 12 if we used top end guidance (48M).

For the right company, nabbing Sky for a PE of 12-14 is not bad going at all - while still enabling existing shareholders to realise a 'fair value'.

Personally I would think a EV/forward-earnings multiple of 10x is probably top of the range for SKT (so $480m ex-cash EV). SKT will always have the NZ Rugby rights overhang as a drag on its valuation multiple in my opinion (which will get “heavier” the closer the contract expiry looms), unless they can negotiate a much longer rights deal (10 years+) - which seems unlikely. Still a lot of upside in share price before hitting that EV.

[mistaTea]

Personally I would think a EV/forward-earnings multiple of 10x is probably top of the range for SKT (so $480m ex-cash EV).

That may well end up being close enough to where to SP lands based on whatever they decide to do in Feb.

But if Sky is genuinely now turning to profitable growth again in 2022, then I don't think you can definitively cap the 'top end' to 10x.