RNS Number : 3182N
British Sky Broadcasting Group PLC
25 July 2014
 



25 July 2014

BSkyB to create a world-class multinational pay TV business with acquisition of
Sky Italia and 57.4% stake in Sky Deutschland

 

·    New Sky to be the number one pay TV provider in three of the four largest markets in Europe

·    Enlarged business will have expanded growth opportunity, benefits of scale, and significant synergy potential

·    Combination of complementary businesses with shared brand and market-leading capabilities in content, innovation and service delivery for customers

·    Expected to be at least neutral to earnings per share in second full financial year of ownership and strongly accretive thereafter

·    Total cash consideration to 21st Century Fox of £4.9 billion and the transfer of BSkyB's 21% stake in National Geographic Channel

·    Cash consideration to be funded through a combination of a placing of 156.1 million new Ordinary Shares representing approximately 9.99% of the Company's issued share capital, new debt facilities and existing cash resources

·    BSkyB making required offer to minority shareholders in Sky Deutschland at €6.75 per share

 

BSkyB today announces it has entered into agreements with 21st Century Fox to acquire 21st Century Fox's 100% stake in Sky Italia and its 57.4% interest in Sky Deutschland. The enlarged company will be a world-class multinational pay TV provider that serves 20 million customers and brings together the leading pay TV businesses in three of Europe's four biggest markets.

The total consideration for the acquisition of Sky Italia is £2.45 billion with approximately £2.07 billion to be paid in cash and the balance to be satisfied through the transfer of BSkyB's 21% stake in National Geographic Channel International to 21st Century Fox at a value of £382 million[1]. The acquisition of 21st Century Fox's shareholding in Sky Deutschland is for a consideration of £2.9 billion in cash, valuing Sky Deutschland at €6.75 per share. The transactions are subject to regulatory and independent shareholder approval.

Creating a world-class multinational pay TV business

The combination of the three businesses will build on BSkyB's strong track record of delivery and success in the UK and Ireland. Over the last five years, BSkyB has more than doubled its paid-for subscription product base and increased revenues by 43% as a result of its well-established strategy of broad-based growth.

The enlarged business will benefit from a significantly expanded opportunity for long-term growth and value creation, with 97 million addressable households. Of these households, around 66 million have yet to take pay TV and there is significant headroom to sell additional products to and launch new services for customers.

The acquisitions will also bring benefits of scale, taking BSkyB from 11.5 million customers to 20 million. On an aggregated basis[2], group revenues will increase from £7.6 billion for the standalone BSkyB to £11.2 billion.

The enlarged group will be better positioned to take advantage of the enhanced growth opportunity as result of the ability to share expertise across the wider business. BSkyB, Sky Italia and Sky Deutschland are complementary businesses with a common brand, operating similar business models and offering similar products to customers. Bringing them together will enable the application of best-in-class capabilities in areas such as content, innovation and service delivery, to the benefit all of three businesses and their customers.

 

Offer to minority Sky Deutschland shareholders

Following the agreement to acquire 21st Century Fox's 57.4% stake in Sky Deutschland, BSkyB has announced that it will launch a voluntary cash offer to Sky Deutschland's minority shareholders at €6.75 per share. There is no minimum acceptance condition as BSkyB believes it can realise the advantages of closer collaboration with Sky Deutschland and support its continued growth and development with the 57.4% stake it is acquiring through this transaction.

 

Total consideration

The total consideration for the acquisition of Sky Italia is £2.45 billion with approximately £2.07 billion to be paid in cash and the balance to be satisfied through the transfer of BSkyB's 21% stake in National Geographic Channel to 21st Century Fox at a value of £382 million[3]. Subject to the number of Sky Deutschland minority shareholders that accept the offer, the total cash consideration overall may be up to approximately £7.0 billion.

The consideration will be funded in part by the proceeds of a placing of 156.1 million new Ordinary Shares representing approximately 9.99% of the issued share capital of BSkyB, announced separately today. 21st Century Fox has irrevocably undertaken to participate in the placing pro rata in order to maintain its holding in BSkyB at the current level of 39.14%. The remaining consideration will come from a combination of new debt facilities and cash resources.

 

Value creation for shareholders

The Transaction is financially attractive and provides a clear path to enhanced value creation for BSkyB shareholders. It is expected to be at least neutral to earnings per share in the second full financial year of ownership and strongly enhancing to earnings per share thereafter.

In addition to the enhanced growth profile of the enlarged group, BSkyB expects to be able to realise £200 million of run-rate cash synergies by the end of the second full financial year after completion, with further additional synergies expected in subsequent periods. The significant majority of synergies are expected to arise from the UK and Italy being the two businesses with larger and more similar direct to home operations. Other than the acquisition of acquired programming rights, cost savings are expected across most areas of the business including the production of live events, commissioning, back office IT systems, rationalisation of suppliers and, over time, in product and set top box development. Management's current estimate is that the costs to achieve these synergies will be around £150 million.

All Board discussion of the Transaction has been confined solely within a committee composed of Independent Directors of BSkyB. Directors affiliated with 21st Century Fox have not participated.

 

Jeremy Darroch, BSkyB's Chief Executive, said: 

"This transaction will create a world-class, multinational pay TV business with enhanced headroom for growth and immediate benefits of scale. The three Sky businesses are leaders in their home markets and will be even stronger together. By creating the new Sky, we will be able to use our collective strengths and expertise to serve customers better, grow faster and enhance returns."

 

Nick Ferguson, Chairman of BSkyB, said:

"The Independent Directors of BSkyB unanimously believe the strategic rationale for a combination with Sky Italia and Sky Deutschland is compelling. The agreed valuation represents an attractive financial opportunity that will deliver growth and value creation for all shareholders."

 

 

Enquiries:

 

Analysts/Investors:




Edward Steel

Tel: 020 7032 2093

Lang Messer

Tel: 020 7032 2657



E-mail: investor-relations@Sky.com




Press:


 


Alice Macandrew

Tel: 020 7032 4256

Robin Tozer

Tel: 020 7032 0620

E-mail:BSkyBPress@BSkyB.com

 

 

Analysts/Investors:


Barclays (Financial Adviser)

Tel: 020 7773 4324

Matthew Smith


Hugh Moran




Barclays (Joint Corporate Broker)


Mark Astaire


Marcus Jackson




Morgan Stanley (Financial Adviser)

Tel: 020 7425 8000

Simon Smith


Laurence Hopkins


Jan Weber




Morgan Stanley (Joint Corporate Broker)


Paul Baker


Ben Grindley


Doug Campbell


There will be a presentation for analysts and investors at 8.30 a.m. (BST) at Allen & Overy LLP, One Bishops Square, London, E1 6AD.  Participants should register by contacting Felicity Marshall on +44 20 7251 3801 or at felicity.marshall@RLMFinsbury.com.

 

There will be a separate conference call for US analysts and investors at 10.00 a.m. (EDT). To register for this please contact Dana Diver at Taylor Rafferty on +1 212 889 4350. Alternatively you may register online at http://invite.taylor-rafferty.com/_Sky/2014FYCC/Default.htm

A live webcast of the UK presentation and US call, as well as supporting materials, will be available via the Sky website at http://www.sky.com/corporate. Replays will be available subsequently.

Terms used in this announcement shall, unless the context otherwise requires, have the same meanings given to them in Appendix 7.

The Company today separately announces its preliminary consolidated financial statements for the year ended 30 June 2014.

 


Important notices

A copy of the Circular when published will be available from the registered office of the Company and on the Company's website at http://www.sky.com/corporate. The Company will publish a further announcement upon the publication of the Circular.

This Announcement is for information only and, save as expressly set out herein, does not constitute an offer or invitation to underwrite, subscribe for or otherwise acquire or dispose of any securities or investment advice in any jurisdiction, including without limitation, the United Kingdom, the United States, Australia, Canada, Japan, Jersey or South Africa. Persons needing advice should consult an independent financial adviser.

 

This Announcement has been issued by and is the sole responsibility of the Company.  No representation or warranty, express or implied, is or will be made as to, or in relation to, and no responsibility or liability is or will be accepted by Barclays Bank PLC, acting through its Investment Bank or Morgan Stanley & Co. International plc (each a "Bank") or by any of their respective affiliates or agents as to or in relation to, the accuracy or completeness of this Announcement or any other written or oral information made available to or publicly available to any interested party or its advisers, and any liability therefore is expressly disclaimed.

 

Each Bank is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and isacting for the Company in connection with the Transaction and no-one else and will not be responsible to anyone other than the Company for providing the protections afforded to its clients nor for providing advice in relation to the Transaction, the contents of this Announcement or any transaction or any other matters referred to herein.

 

The distribution of this Announcement in certain jurisdictions may be restricted by law.  No action has been taken by the Company or the Banks that would permit an offering of such shares or possession or distribution of this Announcement or any other offering or publicity material relating to such shares in any jurisdiction where action for that purpose is required.  Persons into whose possession this Announcement comes are required by the Company and the Banks to inform themselves about, and to observe, such restrictions.

 

This Announcement contains forward-looking statements. These statements are subject to a number of risks and uncertainties and actual results, and events could differ materially from those currently being anticipated as reflected in such forward-looking statements. The terms "expect", "should be", "will be" and similar expressions identify forward-looking statements. Factors which may cause future outcomes  to  differ  from  those  foreseen  in  forward-looking statements include, but are not limited to: general economic and business conditions; demand for the Company's products and services; competitive factors in the industries in  which the Company operates; exchange rate fluctuations; legislative, fiscal and regulatory developments; political risks; terrorism, acts of war and pandemics; changes in law and legal interpretations affecting  the Company's intellectual property rights and internet communications; and the impact of technological change. Forward-looking statements speak only as of the date of such statements and, except as required by applicable law, the Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events  or otherwise. The information contained in this Announcement is subject to change without notice and neither the Company nor the Banks assume any responsibility or obligation to update publicly or review any of the forward-looking statements contained herein.

 

Any indication in this Announcement of the price at which Ordinary Shares have been bought or sold in the past cannot be relied upon as a guide to future performance.  No statement in this Announcement is intended to be a profit forecast and no statement in this Announcement should be interpreted to mean that earnings per share of the Company for the current or future financial years would necessarily match or exceed the historical published earnings per share of the Company.

 

The Placing Shares referred to in this Announcement have not been and will not be registered under the US Securities Act of 1933, as amended (the "Securities Act"), or under any securities laws of any state or other jurisdiction of the United States and may not be offered, sold, resold, transferred or delivered, directly or indirectly, into or within the United States absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities law. There will be no public offering of the Placing Shares in the United States.

 

 

 

British Sky Broadcasting Group plc ("BSkyB" or the "Company")

Proposed acquisition of Sky Italia and 57.4% stake in Sky Deutschland

1.         Introduction

The Company today announces that:

·      it has conditionally agreed to acquire (through a wholly owned subsidiary) the entire issued and to be issued corporate capital of Sky Italia, a private company incorporated in Italy, from a wholly-owned subsidiary of 21st Century Fox Inc. ("21st Century Fox") (the "Sky Italia Acquisition"), with the consideration being partially settled by the disposal of the Company's indirect 21% stake in National Geographic Channel International ("National Geographic Channel") to certain of 21st Century Fox's wholly owned subsidiaries (the "National Geographic Channel Transfer");

·      it has conditionally agreed to acquire (through a wholly owned subsidiary) 21st Century Fox's entire shareholding in Sky Deutschland, a German stock corporation listed on the Frankfurt Stock Exchange, which, as at the date of this announcement, represents 57.4% of the ordinary share capital of Sky Deutschland on a fully diluted basis (assuming the exercise by 21st Century Fox of its conversion rights pursuant to the Convertible Bond) (the "Sky Deutschland  Acquisition"); and

·      has decided to make a voluntary cash offer to all Sky Deutschland shareholders, subject to certain conditions (the "Sky Deutschland Offer"). The Sky Deutschland Acquisition and the Sky Deutschland Offer are together referred to as the "Sky Deutschland  Transaction".

The Sky Italia Acquisition, the Sky Deutschland Transaction and the National Geographic Channel Transfer comprise the "Transaction".

The consideration payable will be funded in part by the proceeds of a placing of 156.1 million new Ordinary Shares representing approximately 9.99% of the issued share capital of the Company (the "Equity Placing"), announced separately today. 21st Century Fox has undertaken to subscribe for approximately 61.1 million Ordinary Shares so as to maintain its existing percentage shareholding in the Company following completion of the Equity Placing.

The Company will be seeking approval for the Transaction under the Listing Rules from its Independent Shareholders in a general meeting as, for the purposes of the Listing Rules:

·      the Sky Italia Acquisition, the National Geographic Channel Transfer and the Sky Deutschland  Acquisition will each constitute "related party transactions"; and

 

·      the Transaction is of sufficient size relative to the Company to constitute a "class 1 transaction". 

 

As 21st Century Fox is a "related party" under the Listing Rules, 21st Century Fox has undertaken to procure that its wholly owned subsidiary 21st Century Fox Nominees, as holder of 21st Century Fox's holding of Ordinary Shares in the Company, will not to vote on the resolution at the General Meeting.

 

The National Geographic Channel Transfer is conditional upon the completion of the Sky Italia Acquisition and the Sky Italia Acquisition is, in turn, conditional upon the completion of the Sky Deutschland Acquisition.  The Sky Deutschland Acquisition is subject to the same conditions precedent to completion as the Sky Deutschland Offer and will close on the Sky Deutschland Offer Settlement Date.

Although the Sky Deutschland Acquisition, the National Geographic Channel Transfer and the Sky Italia Acquisition are structured as a single transaction and are intended to complete together, if certain conditions of the Sky Italia Acquisition which are not conditions under the Sky Deutschland Acquisition and the Sky Deutschland Offer are not fulfilled (or termination rights arise under the Sky Italia Acquisition), it is possible that the Company could complete the Sky Deutschland Acquisition and the Sky Deutschland Offer, but not complete the Sky Italia Acquisition and the National Geographic Channel Transfer. 

Further details of the Transaction, together with a notice convening a General Meeting to consider the Transaction will be contained in the Circular which is expected to be sent to Shareholders around the end of August.

 

2.         Consideration for the Transaction

Consideration for the Sky Italia Acquisition

The consideration for the Sky Italia Acquisition will be paid in Sterling.

Sky Italia will be acquired on a debt and cash free basis in accordance with a working capital completion adjustment mechanism under the terms of the Sky Italia SPA. Subject to such working capital adjustment, the total consideration for the acquisition of Sky Italia is £2.45 billion with approximately £2.07 billion to be paid in cash and the balance to be satisfied through the transfer of BSkyB's 21% stake in National Geographic Channel to 21st Century Fox at a value of £382 million[4].

Consideration for the Sky Deutschland Transaction

The Sky Deutschland Offer values Sky Deutschland at €6.75 per share which is equal to the price being paid to 21st Century Fox and which is the minimum price permissible for a voluntary cash offer under the German Takeover Act.  

The total consideration for the Sky Deutschland Acquisition is €3.6 billion (£2.9 billion) in cash based on the value of 21st Century Fox's shareholding in Sky Deutschland which, as at the date of this announcement, represents 57.4% of the ordinary share capital of Sky Deutschland on a fully diluted basis (assuming the exercise by 21st Century Fox of its conversion rights pursuant to the Convertible Bond).

The total consideration for the Sky Deutschland Transaction will depend on the number of Sky Deutschland shareholders other than 21st Century Fox and its associates (the "Sky Deutschland Minority Shareholders") that accept the Sky Deutschland Offer.

If all of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, on the basis of the offer price of €6.75 per Sky Deutschland share the Sky Deutschland Transaction will result in consideration of €6.3 billion (£5.0 billion). If none of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, on the basis of the offer price of €6.75 per Sky Deutschland share the consideration for the Sky Deutschland Transaction will total €3.6 billion (£2.9 billion).  

Total consideration for the Transaction

If all of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, the Transaction will result in a combined consideration for the Sky Italia Acquisition (including the National Geographic Channel Transfer) and Sky Deutschland Transaction of £7.4 billion. If none of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, the combined consideration for the Sky Italia Acquisition (including the National Geographic Channel Transfer) and Sky Deutschland Transaction will total £5.3 billion.

The figures set out above for the total consideration for the Transaction are subject to the working capital adjustment mechanism under the terms of the Sky Italia SPA.

3.         Background to and reasons for the Transaction

Information on the Company

The Company is the UK and Ireland's leading home entertainment and communications company, providing services to more than 40% of homes.

In recent years, the Company's successful transition to a multi-product strategy has significantly increased the scale of the business and opened up new sources of growth. Over the last five years, the Company has more than doubled its total paid-for subscription products to 35 million and has added more than two million new customers. This has driven a step change in financial performance, with a 43% increase in revenues over this period and an 132% increase in earnings per share. The Company has a lower value per subscriber than its peer group.

The Company's success is rooted in the combination of strengths in three core areas: content, technology and customers. By increasing the range and quality of its content and innovating across multiple platforms, the Company is opening up a wider market opportunity and creating more ways to reach new customers. The Company has also created adjacent business opportunities in areas such as wholesale channel distribution, international programme sales and targeted advertising.

The rationale for the Transaction is as follows:

Creating a world-class multinational pay TV Group

Bringing together three leading pay TV providers in the UK, Ireland, Italy, Germany and Austria will create a multinational pay TV Group with a leading presence in three of the four largest European TV markets. The combination provides the opportunity to improve further the already compelling customer propositions offered by the Company, Sky Deutschland and Sky Italia in their respective home territories.

Highly attractive opportunity for long-term growth

The Enlarged Group would have an estimated 20 million retail customers and significantly increased headroom of over 97 million targetable customer households. The Company recognises the significant headroom for growth in pay TV penetration in Germany and Italy. Currently BSkyB operates in the UK and Ireland with 53% pay TV penetration and 14 million pay TV household headroom. It is anticipated that following the Transaction the Enlarged Group would operate in countries with a total of 32% pay TV penetration and up to 66 million TV household headroom.

Both countries are at much earlier stages in their maturity profile compared to the UK. Based on IHS Screendigest data and company sources, approximately 72% of Italian households have yet to take pay TV, while an estimated 81% of German households have yet to take pay TV beyond an entry-level package. If the penetration of pay TV in German and Italy grew over time to reach only the current levels of penetration in the UK (which the Independent Directors believe has further growth potential), this would represent a potential growth opportunity of approximately 22 million pay TV customers. 

Furthermore, there is significant headroom for additional product growth in Sky Deutschland and Sky Italia's countries of operation through further take-up of Sky+, High Definition, On Demand, Multiscreen and Sky Go as well as Sky Store. The Company also expects Sky Italia to benefit from its marketing arrangements with both Fastweb and Telecom Italia, enabling it to offer broadband and telephony packages with its pay TV bundles.

Ability to deploy capabilities across the Enlarged Group

The Enlarged Group aims to leverage capabilities and best practice from across the businesses to realise the enhanced growth opportunity. The Company, Sky Italia and Sky Deutschland each have their own strengths and these can be deployed to deliver revenue growth and improved operating efficiency and accelerate innovation. BSkyB has created significant value through the development of new opportunities in adjacent business areas in the UK and Ireland and believes that there is potential for Sky Deutschland and Sky Italia to replicate these ventures. Such initiatives may include replicating the success of Sky Store and Sky AdSmart.

Complementary businesses with shared brand and similar culture

The Company, Sky Italia and Sky Deutschland are complementary businesses that share a common brand and operate similar business models and product sets. The offering of all three entities is underpinned by the "Sky" brand, which the Independent Directors believe consistently represents choice, quality and innovation for customers, underpinned by a culture of continuous improvement.

Each of the businesses shares a strategy to sell more products to more customers by continuously improving the customer experience and enhancing the range and quality of their content.

Strong management teams with a proven track record of delivery

The management teams of the Company, Sky Italia and Sky Deutschland have a long history of working together. The CEOs of Sky Deutschland and Sky Italia, Brian Sullivan and Andrea Zappia respectively, have both previously held senior management positions within the Company.  

It is the right time for BSkyB to expand internationally

The Company's UK and Ireland business is delivering strong growth by executing well against a consistent and successful strategy and the Independent Directors believe that there is significant headroom for growth in BSkyB's core subscription products in TV and home communications.

In addition, the Company is creating new revenue opportunities in emerging segments of the market, for example by addressing the pay-light segment with a second brand NOW TV and by participating in the estimated £1.6 billion movie transactions sector through the growth of Sky Store. The Company's adjacent businesses offer further potential for attractive revenue and profit growth. Each of these opportunities is additive and highly complementary.

The Independent Directors believe that it is the right time to take the Company's expertise to new territories, which offer enhanced opportunities for growth across a significantly number of increased addressable households.

Significant value creation for the Company's Shareholders

The Independent Directors believe that the Company has expanding growth opportunities in the UK and Ireland, a well-established and successful strategy, and a strong track record of delivery.

The Transaction will build upon this strong platform to further enhance the Company's medium to long-term growth prospects given that Sky Deutschland and Sky Italia have a significant opportunity to capitalise on the headroom for customer and product growth in their relevant markets. The Company, Sky Deutschland and Sky Italia share similar cultures, business processes, products and services and have common suppliers, which will enable delivery of synergies.

In addition to this enhanced growth profile, BSkyB also expects to be able to realise synergies, and is targeting £200 million of run-rate cash synergies by June 2017, with further additional synergies expected in subsequent periods. These cash synergies are expected to arise principally from deploying shared expertise to drive operating efficiencies, delivering procurement efficiencies and the creation of a single unified product roadmap, as well as revenue synergies from deploying shared expertise on products and services growth.

4.         Information on Sky Italia and the Italian pay TV sector

Background

Sky Italia is currently the leading pay TV provider in Italy, and is headquartered in Milan, having been established in 2003 from the merger of two direct-to-home platforms, Stream and Telepiu. In September 2004, a wholly owned subsidiary of 21st Century Fox acquired the remaining corporate capital in Sky Italia owned by Telecom Italia, resulting in Sky Italia becoming a wholly owned subsidiary of 21st Century Fox. As at December 2013, Sky Italia employed approximately 5,500 employees. Sky Italia's strengths include a stable customer base, brand leadership, leading premium content offering, and original production capability with growth and efficiency plans in place.

The Italian TV market

As at December 2013, Italy was the fourth largest TV market in Western Europe, with a total TV audience of approximately 25 million households and market penetration of 28%, which is considerably lower than the Western European average of 46%. Pay TV services are available through Sky Italia's direct-to-home platform offering and a digital terrestrial television platform operated by Mediaset. There is no cable television, IPTV has failed to take off so far due to underdeveloped broadband infrastructure and there are no triple play operators in the market.  Sky Italia is the clear leader in pay TV in Italy with approximately 4.75 million pay TV subscribers as at March 2014.

Sky Italia's product offering

Sky Italia has a comprehensive TV product offering which includes MySky, HD, 3D Multivision, Sky Go and On Demand. Sky Italia also offers a standalone OTT pay TV product (SkyOnline), which launched in March 2014. Sky Italia offers a bundled triple-play package that is co-marketed with Italian broadband and telecoms service provider Fastweb, whose target is to reach 20% of Italian households and business sites by 2015. In April 2014 Sky Italia also signed a strategic agreement with Telecom Italia to distribute Sky Italia's full offering on its network and has indicated that this service is expected to be available from 2015.

As at February 2014, Sky Italia provided in excess of 12 million active services to its approximately 4.75 million subscribers, and as at June 2014 Sky Italia offered approximately 180 channels (of which 62 are offered in HD). As at June 2014, the basic television package for €19 per month comprised more than 50 general entertainment, lifestyle and news channels. In addition, Sky Italia offers three premium content packages which are: a) Premium Sports (8 channels available in HD, of which 7 are also available in non-HD, featuring a broad range of sports from golf to tennis and motorsport. Key featured events include Formula 1 and Moto GP); b) Premium Football (four channels available in both HD and non-HD, featuring Serie A and Champions League games); and c) Premium Movies (12 channels available in HD of which 11 are also available in non-HD, featuring exclusive first run TV access to movies from five of the seven major US studios - Fox, Disney, Sony, MGM and Paramount).

 

Operating and financial performance

The table below outlines certain recent operating and financial performance metrics for Sky Italia.

 

 

Year ended 30 June 2012

Year ended
30 June 2013

Year ended
30 June 2014

Operating performance

Subscribers (thousands)

 

4,902

4,756

4,725

Financial Performance (unaudited in € millions)

Revenue

 

2,873

2,911

2,846

Adjusted EBITDA[5]

 

427

285

312

Capital expenditure

 

248

191

175

Profit (loss) after tax

 

92

(38)

(8)

 

The unaudited historical operating and financial information has been restated on a basis consistent with the accounting policies adopted in the Company's latest annual financial statement, being for the year ended 30 June 2014. Sky Italia's financial statements for the year ended 30 June 2014 are subject to final review by the directors of Sky Italia and Sky Italia's auditors and therefore could change between the date of this announcement and completion of the audit process.

 

As at 30 June 2014, the unaudited Sky Italia total assets were €1.774 billion and net assets were €733 million.

In accordance with the Listing Rules, the Circular when published, will include full audited historic three year financial information on Sky Italia according to IFRS, in a form consistent with the accounting policies adopted by the Company in its own annual consolidated accounts.

Material contracts

No material contracts (not being contracts entered into in the ordinary course of business) have been entered into by Sky Italia or a member of the Sky Italia Group in the two years immediately prior to the date of the Announcement, or have been entered into by a member of Sky Italia at any time and contain an obligation or entitlement which is material to Sky Italia as at the date of this Announcement.

Litigation

Save as disclosed below, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) during the 12 months preceding the date of this Announcement which may have, or have had in the recent past, a significant effect on the financial position or profitability of Sky Italia and/or the Group.

On 13 January 2014, the European Commission opened a formal antitrust investigation into cross-border provision of pay TV services in the EU. The Commission will examine certain provisions relating to territorial protection in licence agreements between major U.S. film studios (20th Century Fox, Warner Bros., Sony Pictures, NBCUniversal and Paramount) and key European pay TV broadcasters (the Company, Canal Plus, Sky Italia, Sky Deutschland and DTS, which is operating under the Canal Plus brand in Spain). However, the Commission explicitly states that the question of the legality of granting territorial licenses within the EU is not an issue in this investigation - the focus is on contractual clauses that may require pay TV operators to comply with absolute territorial exclusivity. So far as the Company is aware, the Commission has not reached any conclusions at this stage.  Consequently the Company is not yet able to assess whether, or the extent to which, this investigation will have a material effect on the Enlarged Group.  The timing of the proceedings is not yet certain.

5.         Information on Sky Deutschland and the German pay TV sector

The Company requested access to Sky Deutschland's non-public information from Sky Deutschland shortly before the Company's announcement on 25 July 2014 of its intention to make the Sky Deutschland Offer. The Company has not been given such access save for limited information relating to change of control provisions in certain contracts and financing agreements. Accordingly, the information included in this announcement in relation to Sky Deutschland has principally been compiled on the basis of publicly available information and has not been verified by the Company or by Sky Deutschland or the Sky Deutschland directors.

Background

Sky Deutschland is a leading pay TV provider in both Germany and Austria. Sky Deutschland distributes its market-leading packages via its own satellite platform. Sky Deutschland also benefits from marketing and distribution agreements with a number of partners including Vodafone, Deutsche Telekom and Liberty Global, enabling it to distribute content through cable and IPTV and it also offers its channels via wholesale arrangements in Switzerland. Sky Deutschland has approximately 2,400 employees.

As at 31 March 2014, Sky Deutschland reported a subscriber base of over 3.7 million households. Sky Deutschland's customer proposition includes exclusive content for its customers across sport, movies and entertainment. 21st Century Fox, acting through a wholly owned subsidiary, originally acquired a minority stake in Premiere AG in 2008, and the business was rebranded as Sky Deutschland in 2009. 21st Century Fox increased its stake on 15 January 2013 and 7 February 2013 such that, as the date of this announcement it owns 57.4% of the ordinary share capital of Sky Deutschland on a fully diluted basis (assuming the exercise by 21st Century Fox of its conversion rights pursuant to the Convertible Bond). Sky Deutschland's shares are admitted to trading on the regulated market in the Prime Standard segment of the Frankfurt Stock Exchange and Sky Deutschland is included in the MDAX Index.

Sky Deutschland's strengths include strong performance in churn and ARPU, it is the clear leader in premier sports and movies, has a track record of innovation and uses content to drive the digital switchover.

German pay TV sector

As at 31 December 2013, Germany and Austria together formed the largest TV market in Western Europe, with a total TV audience of approximately 42 million households. However, as at 31 December 2013, Germany and Austria combined had one of the lowest pay TV penetration rates in Western Europe at around 19% (excluding entry level cable), considerably lower than the Western European average as at 31 December 2013, of 46%. Historically a driver for low pay TV penetration has been the strong offering provided by free-to-air broadcasters and the absence of premium pay TV content providers. However, in recent years pay TV penetration has increased significantly in Germany and Austria, and the Company believes that Sky Deutschland has been able to establish itself as the leader in pay TV in Germany due to three principal factors: through exclusive and differentiated content, Sky Deutschland has been able to generate high demand from customers; and through distribution and marketing arrangements with cable, IPTV and other platform providers, Sky Deutschland is available across all core TV platforms in Germany and Austria. Sky Deutschland has seen real growth in its subscriber base, adding in excess of 1 million subscribers over the last three years to 3.7 million and 304,000 net additions in the calendar year 2013.

Sky Deutschland's product offering

Sky Deutschland's suite of products includes Sky+, Sky Anytime, Sky HD, Sky Go (Germany and Austria's largest OTT pay TV service, with 70 million customer sessions in 2013), Zweitekarte and Sky Anytime, which served 3 million households as at 31 December 2013, Sky 3D and Snap, its OTT platform which launched in December 2013 and is available to Sky Deutschland customers and those without a Sky Deutschland subscription on iPad, iPhone, Samsung Smart TV and Apple TV. Sky Deutschland leads the German and Austrian market with PVR and on demand capability, although PVR penetration remains low and represents a significant growth opportunity; as at 31 December 2013 Germany had only 7.5 million VOD enabled pay TV households compared to France at 20.5 million and the UK at 15.3 million households. Sky premium HD subscribers as at 31 December 2013 were 1.8 million (1.5 million as at 31 December 2012) with penetration of 49% (45% as at 31 December 2012).

As at 31 December 2013, Sky Deutschland offered around 80 channels including HD, through five possible content packages. In addition to two basic packages, as at such date Sky Deutschland offered three premium packages that are purchasable as buy-through products from the basic tier: Film (providing access to first pay rights from major Hollywood studios across ten thematic film channels), Sports (featuring a selection of sport including UEFA Champions League, Formula 1, tennis and golf) and Bundesliga (providing exclusive access to the first and second division of Bundesliga via two 24 hour channels).

Operating and Financial Performance

Sky Deutschland's operating and financial performance information has been reproduced without material amendment from Sky Deutschland's audited consolidated financial statements for the years ended 31 December 2011, 2012 and 2013 and Sky Deutschland's unaudited interim consolidated financial statements for the three month period ended 31 March 2014. This operating and financial performance table has not been verified by the Company or by Sky Deutschland or the Sky Deutschland directors.

 

 

 

Year ended 31 December 2011

Year ended 31 December 2012*

Year ended 31 December 2013

Interim three month period
31 March 2014

Operating Performance

Direct Subscribers (thousands)

3,012

3,363

3,667

3,731

Wholesale Subscribers (thousands)

131

125

268

258

Financial Performance (in € millions)

Revenue

1,138

1,333

1,546

421

EBITDA

(155.5)

(47.5)

34.7

(8.6)

Capital expenditure

96.7

110.1

113.6

28.9

(Loss) after tax

(278)

(192.5)

(133.1)

(53.4)

* Retroactive adjustment of 2012 financial figures due to change to IAS 19R. 2011 as reported by Sky Deutschland at the time

Although Sky Deutschland prepares its audited consolidated financial statements in accordance with IFRS, the Company has not had access to Sky Deutschland's non-public information to enable it to determine whether there are significant differences between the policies adopted by the Company and those adopted by Sky Deutschland that might be material to Sky Deutschland's financial information.

As at 31 March 2014, the audited Sky Deutschland gross assets were €1.328 billion and net assets were €277 million.

Sky Deutschland's tax position

In its annual report for the financial year ended 31 December 2013, Sky Deutschland disclosed that as of the balance sheet date Sky Deutschland had accumulated corporate tax losses of €2,573 billion (circa €300 million net present value). Sky Deutschland management stated in that annual report that it believed that, pursuant to a ruling of the Munich tax authorities, Sky Deutschland should be able to retain a significant part of its current German tax losses and tax loss carry forwards in the event of relevant changes to Sky Deutschland's shareholder structure. However, it will not be known whether this is the case in respect of the Sky Deutschland Transaction until after completion of the Sky Deutschland Transaction. The financial effects of the Transaction outlined in this Announcement do not assume the utilisation of these corporate tax losses.

Material Contracts

The Company has not had access to Sky Deutschland's non-public information save for limited information relating to change of control provisions in certain contracts and financing agreements. The information set out below therefore is derived from Sky Deutschland's publicly available information, and has not been verified by the Company or by Sky Deutschland or the Sky Deutschland directors. Set out below are links to the contracts identified by Sky Deutschland in its recent public disclosures.

·      Sky Deutschland's ad hoc release dated 19 May 2014:

http://ir.sky.de/cgi-bin/show.ssp?companyName=sky&language=English&id=3999&newsID=1409323

·      pages of Sky Deutschland's unaudited interim financial statements for the three month period ended 31 March 2014:

            http://ir.sky.de/cgi-bin/show.ssp?companyName=sky&language=English&id=3100201401

·      pages of Sky Deutschland's Annual Report and Accounts for the year ended 31 December 2013:

            http://ir.sky.de/cgi-bin/show.ssp?companyName=sky&language=English&id=3100201304

·      page 111 of Sky Deutschland's public offer prospectus dated 21 January 2013

http://ir.sky.de/cgi-bin/show.ssp?id=3800&companyName=sky&language=English 

 

The Company is unable to determine whether the contracts set out in the pages/links referenced above are material contracts of Sky Deutschland or whether Sky Deutschland is a party to any other material contracts.

Litigation

The Company has not had access to Sky Deutschland's non-public information save for limited information relating to change of control provisions in certain contracts and financing agreements. The information set out below is therefore derived from Sky Deutschland's publicly available information and has not been verified by the Company or by Sky Deutschland or the Sky Deutschland directors.

Save as set out below, as far as the Company is aware having regard to information included in public documents published by Sky Deutschland AG, there are no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware) during the 12 months preceding the date of this Announcement which may have, or have had in the recent past, a significant effect on the financial position or profitability of Sky Deutschland and/or Sky Deutschland.

The disclosure made by Sky Deutschland in relation to litigation in its unaudited interim financial statements for the three month period ended 31 March 2014 (pages 42 to 44) is available from the link set out below:     

http://ir.Sky.de/cgi-bin/show.ssp?companyName=Sky&language=English&id=3100201401

6.         Principal Terms and Conditions of the Transaction

On 25 July 2014, the Company and 21st Century Fox (each through their respective wholly owned subsidiaries) entered into the Sky Italia SPA and the Sky Deutschland SPA. A wholly owned subsidiary of the Company will make the Sky Deutschland Offer to Sky Deutschland shareholders pursuant to the Sky Deutschland Offer Document, which is expected to be published on or about the end of August 2014.

The National Geographic Channel Transfer is conditional upon the completion of the Sky Italia Acquisition and the Sky Italia Acquisition is, in turn, conditional upon satisfaction or waiver (as applicable) of the conditions to the Sky Deutschland Acquisition. The Sky Deutschland Acquisition is subject to the same conditions precedent to completion as the Sky Deutschland Offer.

Completion of the Sky Italia Acquisition and the Sky Deutschland Acquisition are conditional upon the fulfilment (or, where applicable, waiver) of the respective conditions set out in the Sale and Purchase Agreements. The Sky Deutschland Offer is conditional upon the fulfilment (or, where applicable, waiver) of the conditions which will be set out in the Sky Deutschland Offer Document. The conditions to the Sale and Purchase Agreements and the Sky Deutschland Offer Document include, amongst other things:

·      receipt of all relevant anti-trust/merger control clearances;

·      receipt of relevant local regulatory approvals relating to broadcasting, media and communications;

·      approval of the Transaction by the Independent Shareholders;

·      no material adverse changes having occurred in respect of Sky Deutschland or Sky Italia, as the case may be; and

·      the waiver by certain third parties of rights arising from the change of control of Sky Italia or Sky Deutschland, as the case may be, resulting from the Transaction under certain contracts.

Although the Sky Deutschland Transaction, the National Geographic Channel Transfer and the Sky Italia Acquisition are structured as parts of a single transaction which is intended to complete together, if certain conditions of the Sky Italia Acquisition which are not conditions to the Sky Deutschland Transaction are not fulfilled (or termination rights arise under the Sky Italia Acquisition), then the Company could complete the Sky Deutschland Transaction, but not complete the Sky Italia Acquisition and the National Geographic Channel Transfer.

7.         Principal Agreements in connection with the Transaction

Sky Italia SPA

Under the terms of the Sky Italia SPA, Sky Italian Holdings has conditionally agreed to purchase the Sky Italia Capital from SGH Stream Sub. The total consideration for the acquisition of Sky Italia is £2.45 billion with approximately £2.07 billion to be paid in cash and the balance to be satisfied through the proposed transfer of BSkyB's 21% stake in National Geographic Channel to 21st Century Fox at a value of £382 million[6].

Principal terms of the Sky Italia SPA

Completion of the Sky Italia SPA is conditional upon, amongst other things, the satisfaction or, if applicable, waiver of the following conditions:

a)   the approval of the Transaction by the Independent Shareholders;

b)   antitrust/merger control clearance from the European Commission and/or the Italian Competition Authority;

c)   antitrust/merger control clearance from the Jersey Competition Regulatory Authority;

d)   authorisation by the Italian Communications Authority for (i) the acquisition of a company operating in the radio/TV sector, and (ii) the potential acquisition of a dominant position in the media and telecommunication sectors and the control of pluralism;

e)   completion of the Sky Deutschland SPA;

f)    the waiver of termination rights arising in relation to the change of control resulting from the Transaction in respect of certain contracts;

g)   no event, circumstance or change having occurred which would have a material adverse effect on the business, assets, operations or financial conditions of Sky Italia; and

h)   the conditions to the National Geographic Channel SPA having been satisfied or waived.

The Sky Italia SPA can also be terminated by Sky Italian Holdings (or, where specified below, by 21st Century Fox) in certain circumstances, including:

a)   any of the warranties as to title to and ownership of the Sky Italia Capital and the capacity of 21st Century Fox and SGH Stream Sub to enter into the Sky Italia SPA being or becoming untrue or misleading and, where capable of remedy, not remedied;

b)   any material breach of any covenant in the Sky Italia SPA which is material to the Sky Italia Acquisition; or

c)   a material adverse change, as described above, occurring in respect of Sky Italia.

The longstop date for completion of the Sky Italia Acquisition is up to 18 months from signing of the Sky Italia SPA unless the parties agree otherwise. SGH Stream Sub and Sky Italian Holdings have given mutual covenants to use their respective reasonable endeavours to take the steps necessary to satisfy certain of the conditions precedent to completion of the Sky Italia SPA.

SGH Stream Sub (and 21st Century Fox, where applicable) has given customary warranties, covenants and indemnities to Sky Italian Holdings under the Sky Italia SPA, including certain indemnities relating to tax and other matters.

The obligations of SGH Stream Sub under the Sky Italia SPA have been guaranteed by 21st Century Fox and the obligations of Sky Italian Holdings under the Sky Italia SPA have been guaranteed by the Company.

The liability of SGH Stream Sub for breach of the warranties given by SGH Stream Sub Inc. in respect of the business and operations of Sky Italia terminates a maximum of two years after completion of the Sky Italia Acquisition.

SGH Stream Sub has agreed to carry on the Sky Italia business, prior to completion of the Sky Italia SPA, in the ordinary course and substantially in the same manner as its business has been conducted previously and to procure that certain acts will only be carried out with the consent of Sky Italian Holdings.

SGH Stream Sub has given certain commitments on its own behalf and on behalf of 21st Century Fox, not to retail to consumers a premium or basic pay audio visual content service in Italy, San Marino, Malta and the Vatican City until January 2017 subject to certain exceptions.

The consideration for the Sky Italia Acquisition will be subject to a working capital completion adjustment mechanism, pursuant to which consideration payable will increase to the extent that working capital of Sky Italia at the date of completion of the Sky Italia SPA exceeds the agreed target working capital amount, and will decrease to the extent that working capital of Sky Italia at the date of completion of the Sky Italia SPA is below the agreed target working capital amount.

Sky Italia Tax Deed

In connection with the purchase of the Sky Italia Capital, Sky Italian Holdings and SGH Stream Sub will enter into a tax deed which will take effect as at completion of the Sky Italia SPA.  Pursuant to the Tax Deed, SGH Stream Sub agrees to indemnify Sky Italian Holdings (subject to certain limitations) against the risk of unexpected tax liabilities arising to the Sky Italia group companies principally in respect of events occurring, or profits earned, before completion, subject to certain customary exclusions.

National Geographic Channel SPA

Sky Ventures currently holds a 21% stake in National Geographic Channel. The remaining interests in National Geographic Channel are indirectly held between Fox NGC (International) Holdings, Inc. and Fox International Channels (US), Inc. ("National Geographic Channel Purchasers") (which together own approximately 52%) and the National Geographic Channel Society (which owns approximately 27%). Sky Ventures' stake is accounted for as an equity investment, and while Sky Ventures has board representation and typical minority protection rights, it has no management involvement in the venture.

Principal terms of the National Geographic Channel SPA

Under the terms of the National Geographic Channel SPA, Sky Ventures has conditionally agreed to sell its interests in National Geographic Channel to National Geographic Channel Purchasers for notional consideration of US$650 million.

Sky Ventures has given customary warranties as to title to and ownership of its units in National Geographic Channel and capacity to enter into the National Geographic Channel SPA.

The Society has a pro-rata right of first refusal in respect of the sale of Sky Ventures' interest in National Geographic Channel, such right is not conditional on the Sky Italia Acquisition. If the Society exercises this right, the adjustment to the total consideration for the Sky Italia acquisition will reflect this such that a greater amount will be paid in cash and a lesser amount will be settled by the interest in the National Geographic Channel.

Sky Ventures has given various commitments and undertakings on its own behalf and on behalf of BSkyB not to compete with the business of National Geographic Channel until January 2017.

Completion of the National Geographic Channel Transfer is conditional on completion of the Sky Italia SPA in accordance with its terms.

Sky Deutschland Offer Document

The Sky Deutschland Offer

Kronen tausend985 GmbH (to be renamed to Sky German Holdings GmbH) announced today its decision to make a voluntary cash takeover offer to all Sky Deutschland shareholders at a price of €6.75 per Sky Deutschland share, subject to certain conditions. The Offer Document, as well as any further information with regards to the Offer, will be made available in due course to investors and the market under www.tvinformationupdate.com.

Principal terms of the Sky Deutschland Offer

The Sky Deutschland Offer is expected to be conditional upon, amongst other things, the satisfaction or, if applicable, waiver of the following conditions:

a)   the approval of the Sky Deutschland Transaction by the Independent Shareholders;

b)   antitrust/merger control clearance from the European Commission and/or the German competition authority;

c)   antitrust/merger control clearance from the Jersey Competition Regulatory Authority;

d)   antitrust/merger control clearance from the Austrian antitrust authorities;

e)   the German state media authorities in Bavaria and in Hamburg and Schleswig-Holstein issuing statements of non-objection;

f)    authorisation by the Austrian communications authority of an indirect change of ownership of an Austrian media service licence holder, if required;

g)   the relevant counterparty having waived rights arising in relation to the change of control of Sky Deutschland resulting from the Sky Deutschland Transaction in respect of certain contracts;

h)   the non-occurrence of certain events for example the issue of new shares by Sky Deutschland; and

i)    no material adverse effect (measured by reference to the EBITDA of Sky Deutschland) having occurred and there has been no loss or termination of rights under certain contracts or of Sky Deutschland's broadcasting licences.

Pursuant to the German Takeover Act, conditions 2(a), (g), (h) and (i) above need to be satisfied or, if applicable, waived by the expiry of the acceptance period under the Sky Deutschland Offer (and in the case of 2(a) at least five working days (including Saturdays) before).

The conditions in paragraphs 2(b)-(f) must be satisfied on or before 25 July 2015 (the "Sky Deutschland Longstop Date"), otherwise the Sky Deutschland Offer will lapse. It is anticipated that these competition and regulatory clearances, if granted, could be received by September or October 2014 and that the Sky Deutschland Offer could close on or around October or November 2014, subject to the satisfaction or waiver of the other conditions to the Sky Deutschland Offer.

The conditions to the Sky Deutschland Offer may change to reflect the requirements of BaFin following submission of the Sky Deutschland Offer Document to BaFin prior to publication.  Any change which results in a more onerous condition must be approved by 21st Century Fox (such approval not to be unreasonably withheld). There is no minimum acceptance condition to the Sky Deutschland Offer.

 

Sky Deutschland SPA

Under the terms of the Sky Deutschland SPA, Kronen tausend985 GmbH, a wholly owned subsidiary of BSkyB has conditionally agreed to purchase 21st Century Fox Adelaide's shareholding in Sky Deutschland AG., which represents 57.4% of the issued share capital of Sky Deutschland on a fully diluted basis, assuming the exercise by 21st Century Fox Adelaide of its conversion rights pursuant to the Convertible Bond. 21st Century Fox Adelaide has undertaken to exercise such conversion rights prior to completion of the Sky Deutschland SPA. The consideration for 21st Century Fox Adelaide's fully diluted holding in Sky Deutschland is €6.75 per share, being the same price per share offered to the Sky Deutschland Shareholders pursuant to the Sky Deutschland Offer. The aggregate consideration for 21st Century Fox Adelaide's fully diluted holding in Sky Deutschland is €3.6 billion (£2.9 billion).

The proposed offer conditions, and as a consequence the conditions that apply to the SPA, may still change in response to comments on the offer document which may be received from the German regulator (BaFin).

Principal terms of the Sky Deutschland SPA

Completion of the Sky Deutschland SPA is conditional upon the satisfaction or, if applicable, waiver of the conditions to the Sky Deutschland Offer (as set out above) on or before the Sky Deutschland Longstop Date.

Kronen tausend985 GmbH  may, by written notice to 21st Century Fox Adelaide, waive any of the conditions above, other than conditions (a) and (b), at any time before the expiry of the acceptance period for the Sky Deutschland Offer.

The Sky Deutschland SPA can also be terminated by Kronen tausend985 GmbH (or, where specified below, by 21st Century Fox Adelaide) in certain circumstances, including:

a)   any of the customary warranties as to title to and ownership of the shares in Sky Deutschland, and capacity of 21st Century Fox and 21st Century Fox Adelaide to enter into the Sky Deutschland SPA, being or becoming untrue or misleading or having been breached and, where capable of remedy, not remedied;

b)   any material breach by 21st Century Fox Adelaide of any covenant of the Sky Deutschland SPA which is material to the acquisition of Sky Deutschland; or

c)   the circumstances referred to in the conditions described in paragraphs (h) and (i) of the summary of the principal terms of the Sky Deutschland Offer occur prior to the end of the acceptance period under the Sky Deutschland Offer.

21st Century Fox Adelaide has given customary warranties as to title to and ownership of the shares in Sky Deutschland and the capacity of 21st Century Fox and 21st Century Fox Adelaide to enter into the Sky Deutschland SPA.

The obligations of 21st Century Fox Adelaide under the Sky Deutschland SPA have been guaranteed by 21st Century Fox and the obligations of Kronen tausend985 GmbH  under the Sky Deutschland SPA have been guaranteed by the Company.

21st Century Fox Adelaide has given an undertaking not to, and to procure that members of the 21st Century Fox Group do not, retail to consumers a premium or basic pay audio visual content service in Germany or Austria prior 1 January 2017.

Brand Licence Agreement

The Company intends to amend the trade mark licence entered into between BSkyB Limited, a wholly owned subsidiary of the Company, and 21st Century Fox America Incorporated ("NAI") (as successor to 21st Century Fox America Publishing Incorporated) as of 30 December 1997, as amended and novated from time to time and which was novated to the Company on 24 October 2003 (the "Brand Licence Agreement").  The amendment agreement will: (i) restrict the territory of the Brand Licence Agreement to Bhutan, Bangladesh, India, the Maldives, Nepal, Pakistan, the Seychelles and Sri Lanka and remove all other territories and rights in other territories in respect of which the licence is otherwise granted; (ii) amend certain other provisions of the Brand Licence Agreement, as agreed between the parties; and (iii) as a matter of convenience, effect the novation of the Brand Licence Agreement to BSkyB International AG ("SIAG") (the "Brand Licence Agreement Amendment and Novation").

NAI will be required to terminate all sub-licences granted by it under the Brand Licence Agreement in territories removed from the licence scope by the Brand Licence Agreement Amendment and Novation, including sub-licences to Sky Italia. A new brand licence will be entered into between SIAG and Sky Italia in due course.

8.         Financing of the Transaction

The proposed total consideration for the Transaction will be financed through a combination of new debt facilities, existing cash resources (including net proceeds from the Equity Placing) and the National Geographic Channel Transfer.

A schedule of sources and uses and net debt can be found in the Company's 2014 Annual Results presentation at www.sky.com/corporate.

New debt facilities

On 25 July 2014, the Company entered into a £6.6 billion facilities agreement (the "Facilities Agreement") documenting a committed bridge loan facility ("Term Loan A"), term loan facility ("Term Loan B") and revolving loan facility (the "RCF"), (together, the "Facilities"). The Facilities Agreement was entered into between the Company as borrower, British Sky Broadcasting Limited, BSkyB Finance UK plc, Sky-In-Home Service Limited and Sky Subscribers Services Limited as guarantors, Barclays Bank PLC as agent, Barclays Bank PLC, J.P. Morgan Limited and Morgan Stanley Bank International as mandated lead arrangers and bookrunners, Barclays Bank PLC, JPMorgan Chase Bank, N.A. - London Branch and Morgan Stanley Bank, N.A. as underwriters and Barclay Bank PLC, JPMorgan Chase Bank and Morgan Stanley Bank, N.A. - London branch as original lender. 

 

The Facilities Agreement is structured as follows:

i.          Term Loan A of €4.0 billion;

ii.         Term Loan B of €2.5 billion and £450 million; and

iii.        RCF of £1 billion.

Term Loan A and Term Loan B are available to be used to fund, among other things:

·      the cash consideration payable to 21st Century Fox Adelaide for the shares in Sky Deutschland and SGH Stream Sub Inc. for the Sky Italia Capital

·      the cash consideration payable to Sky Deutschland Minority Shareholders in relation to the Sky Deutschland Offer;

·      refinancing of certain indebtedness in the Company;

·      refinancing of certain indebtedness in Sky Deutschland; and

·      fees, commissions, costs and expenses incurred in relation to the acquisition of Sky Deutschland and Sky Italia

The Facilities Agreement contains standard certain funds provisions, relevant for the Sky Deutschland Offer, which restrict the rights of the lenders to drawstop utilisations of Term Loan A and Term Loan B.

Term Loan A matures 12 months after the signing date of the Facilities Agreement (the "Signing Date") subject to an option, at the Company's discretion, to extend for a further one year period.  Term Loan B matures three years after the Signing Date subject to a one year extension period available at the discretion of the lenders.  The RCF is available from earlier to occur of the Sky Deutschland Offer Settlement Date, completion of the Sky Deutschland SPA and completion of the Sky Italia SPA to 30 November 2019, subject to two one year extension options at the discretion of the lenders.

The Facilities Agreement permits, subject to the payment of any applicable break costs, voluntary prepayments and voluntary cancellation of undrawn amounts under both Term Loan A and Term Loan B.

The Facilities Agreement contains standard investment grade loan market association representations, undertakings and events of default as well as certain financial covenants which the Company must observe.  The provisions are substantially similar to those contained in the Company's existing revolving credit facility save that there is an additional restriction on making acquisitions that would constitute a "class 1 transaction" under the Listing Rules without majority lender consent.  This additional restriction automatically falls away in circumstances where the Company's leverage ratio of debt to EBITDA is equal to or below 2.50:1 for two consecutive half yearly periods ending after 30 June 2015.

The financial covenants require the Company to ensure that:

i.    its leverage ratio of Net Debt to EBITDA will not exceed 4 times until (and including) 30 June 2016 and thereafter 3.5 times; and

ii.    EBITDA for each 12 month period is a minimum of 3.5 times Consolidated Interest Charges for such period.

Net Debt, EBITDA and Consolidated Interest Charges are defined in the Facilities Agreement.

In addition, the Facilities Agreement contains standard undertakings relating to the Company's conduct of the Sky Deutschland Transaction and Sky Italia Acquisition.

The Facilities Agreement is unsecured and is guaranteed by certain subsidiaries of the Company. The Facilities Agreement includes provisions whereby certain wholly-owned subsidiaries of the Company may accede to the Facilities Agreement as additional guarantors.

The Facilities Agreement includes a 120 day clean up period to allow the Company to remedy any default or any potential breach of a representation, or covenant which relates to Sky Deutschland or Sky Italia prior to it becoming an event of default under the Facilities Agreement.

The Company intends to access the debt capital markets in connection with financing the Transaction and to refinance Term Loan A and Term Loan B in order to provide longer-term financing. All or part of Term Loan A and Term Loan B may be refinanced through the capital markets without any prepayment penalty. 

The Company's existing revolving credit facility will be cancelled and terminated on or before completion.

Cash resources

The Company intends to fund the cash consideration for the Transaction from its cash resources which includes net proceeds from the Equity Placing and net proceeds from the divestiture of its stake in ITV to Liberty Global.

Pursuant to the Equity Placing, up to approximately 156.1 million new Ordinary Shares representing approximately 9.99% of the issued share capital of BSkyB plc will be placed with both existing and new institutional investors. The Equity Placing was announced separately today. 21st Century Fox has undertaken to subscribe for approximately 61.1 million Ordinary Shares so as to maintain its existing percentage shareholding in the Company following completion of the Placing.

Stake in National Geographic Channel

Sky Ventures (a wholly owned subsidiary of the Company) currently holds a 21% stake in National Geographic Channel. The remaining units in National Geographic Channel are held by the National Geographic Channel Purchasers (which together own approximately 52%) and by the Society (which owns approximately 27%). Sky Ventures' stake in National Geographic Channel will be sold for US$650 million, which will be applied as part settlement of the cash consideration for the Sky Italia Acquisition. The National Geographic Channel Transfer is conditional on completion of the Sky Italia SPA in accordance with its terms.

10.       Financial effects of the Transaction

As noted above, the Independent Directors anticipate that the Transaction will further enhance the Company's long-term growth prospects, particularly as Sky Deutschland and Sky Italia have a significant opportunity to capitalise on the subscriber and product penetration potential in their relevant markets. The Independent Directors believe that the Enlarged Group will have a higher growth profile in the medium and long term than the Company would have as a standalone entity.

The Independent Directors believe that the Transaction will generate significant benefits to Shareholders through BSkyB's ability to deliver substantial operating synergies through the sharing of best practice, implementation of shared expertise, and economies of scale, as well as the enhanced growth opportunities that the combined business will be able to capture.

The Company expects to achieve at least £200 million of run-rate cash synergies by June 2017, with further additional synergies expected in subsequent periods, and costs to achieve these synergies of £150 million.  The synergies are expected to be achieved principally through:

·              the creation of a single unified product development roadmap;

·              the extraction of operating efficiencies through the application of shared expertise across the Enlarged Group, including through customer contact and marketing strategies;

·              the sharing of brand and advertising creative, own-produced shows and events across all three markets;

·              back office infrastructure, hardware, IT, Transmission and box procurement savings;

·              consolidation of TV platform operations; and

·              new revenue opportunities (Adsmart, Sky Store and SkyGo Extra).

Applying Sky's current trading multiple to the expected £200 million run-rate synergies, the capitalised value of synergies would be approximately £2 billion.[7]The Company is targeting achieving revenue synergies from development of shared expertise on products and services growth.

The Transaction is expected to be neutral to earnings per share in the second full financial year following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition. Driven by the enhanced growth profile of the Enlarged Group and the realisation of synergies by 2017, the Transaction is expected to strongly enhance earnings per share in the third full financial year following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition. 

As a result of the Transaction, we expect the Enlarged Group net debt to LTM EBITDA to be in a range of 2.9x to 4.0x, assuming none or all Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer respectively. The Company will retain its commitment to a strong investment grade credit rating aiming to reduce leverage by 0.5x and 0.7x by June 2016.

The Company expects that following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition the Company's credit ratings will be downgraded, the Company remains committed to an investment grade credit rating and supported by the strong cash flow generation capabilities of the Enlarged Group, intends to target a leverage profile of no more than two times EBITDA in the medium-term. The Company's share buyback programme was suspended today. The Company currently plans not to resume share buy-backs or to undertake any further material mergers or acquisitions until this target leverage profile has been achieved.

The Company is committed to ensuring that it has sufficient liquidity resources.

The Company is targeting a return on invested capital above its existing cost of capital in the fifth full financial year following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition.

The estimated synergies are contingent on completion of the Sky Deutschland Transaction and the Sky Italia Acquisition and could not be achieved independently.

The Directors draw your attention to the risk factor headed "The Enlarged Group may not realise the anticipated benefits and synergies of the Transaction" in Appendix 4 of the Announcement in relation to the Sky Italia Acquisition either being delayed or not completing.

11.       Dividend policy

Today, in a separate announcement (the full text of which can be located on the Company's website http://www.Sky.com/corporate), the Company has announced a proposed final dividend of 20 pence per Ordinary Share, which would result in a total dividend of 32 pence per Ordinary Share for the financial year ended 30 June 2014 (2013: 30.0 pence per Ordinary Share), representing an annual increase of 7%.

Reflecting the confidence that the Independent Directors have in the benefits of the Transaction and the cash generative potential of the Enlarged Group, the Independent Directors intend that the Enlarged Group will maintain a progressive dividend policy following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition, providing an attractive mix of growth and capital returns to Shareholders.

Following the initial dilution to earnings arising from the Transaction, the Independent Directors expect to return to the Company's current stated policy of paying out 50% of adjusted earnings as ordinary dividends.

12.       Current trading and outlook

Company

On 25 July 2014, the Company published its preliminary consolidated financial statements for the year ended 30 June 2014, the full text of which can be located on its website http://www.Sky.com/corporate.

The Company has continued to trade in line with management's expectations as at 30 June 2014.

13.       Risk Factors

Refer to Appendix 4 of this Announcement for the risk factors in connection with the Company, the Transaction and the Enlarged Group including those resulting from or impacted by the Transaction.

14.       Expected timetable of principal events

Transaction announced

25 July 2014

Sky Italia SPA, Sky Deutschland SPA and National Geographic Channel SPA signed

25 July 2014

Expected publication date of Circular and Sky Deutschland Offer Document

on or around

end of August 2014

General Meeting to consider the Transaction

 October/November 2014

 

15.       Further information

Further details of the Transaction, together with a notice convening a General Meeting to consider the Transaction will be contained in the Circular expected to be sent to Shareholders in late August 2014.


Appendix 1 - Sky Italia Unaudited Historical Financial Information

The unaudited historical financial information has been restated on a basis consistent with the accounting policies adopted in the Company's latest annual financial statement, being for the year ended 30 June 2014. Sky Italia's financial statements for the year ended 30 June 2014 are subject to final review by the directors of Sky Italia and Sky Italia's auditors and therefore could change between the date of this announcement and completion of the audit process.

 

Unaudited Consolidated Financial Statements

 

Consolidated Income Statement for the year ended 30 June

 

 

 

2014

2013

2012

 

 

€m

€m

€m

Revenue

 

2,846

2,911

2,873

Operating expense

 

(2,832)

(2,939)

(2,701)

Operating profit (loss)

 

14

(28)

172

 

 

 

 

 

Investment income

 

-

2

5

Finance costs

 

(2)

(6)

(11)

Profit (loss) before tax

 

12

(32)

166

 

 

 

 

 

Taxation

 

(20)

(6)

(74)

(Loss) profit for the year attributable to equity shareholders of the parent company

 

(8)

(38)

92

 

 

 

 

 

 

All results relate to continuing operations.

 

 



 

Unaudited Consolidated Balance Sheet as at 30 June

 



2014

2013

2012



€m

€m

€m






Non-current assets





Goodwill


300

300

300

Intangible assets


78

82

72

Property, plant and equipment


496

564

628

Deferred tax assets


67

69

61

Trade and other receivables


48

34

83



989

1,049

1,144






Current assets





Inventories


384

302

242

Trade and other receivables


360

377

602

Current tax receivables


26

26

-

Cash and cash equivalents


15

24

12



785

729

856






Total assets


1,774

1,778

2,000






Current liabilities





Trade and other payables


908

906

1,084

Current tax liabilities


-

-

48



908

906

1,132






Non-current liabilities





Provisions


51

55

12

Reserve for employee termination indemnities


23

23

21

Deferred tax liabilities


59

53

49



133

131

82






Total liabilities


1,041

1,037

1,214






Total equity attributable to equity shareholders of the parent company

     733

741    

      786






Total liabilities and shareholders' equity


 1,774

1,778

2,000

 



Unaudited Consolidated Cash Flow Statement for the year ended 30 June

 



2014

2013

2012



€m

€m

€m






Cash flows from operating activities





Cash generated from operations


300

289

295

Interest received


-

-

1

Taxation paid


(10)

(80)

(30)

Net cash from operating activities


290

209

266



 



Cash flows from investing activities


 



Purchase of property, plant and equipment


(138)

(145)

(197)

Purchase of intangible assets


(37)

(46)

(51)

Proceeds from disposals


-

2

13

Net cash used in investing activities


(175)

(189)

(235)



 



Cash flows from financing activities


 



Net repayments of intra-Group borrowings


(122)

(4)

(259)

Interest paid


(2)

(4)

(5)

Net cash used in financing activities


(124)

(8)

(264)



 



Net (decrease) increase in cash and cash equivalents


(9)

12

(233)



 



Cash and cash equivalents at the beginning of the year


24

12

245

Cash and cash equivalents at the end of the year


15

24

12

 

 

Appendix 2 - Sky Deutschland Financial Information

1.         Sky Deutschland historic financial information 

Sky Deutschland's audited consolidated financial statements for the years ended 31 December 2011, 2012 and 2013 and Sky Deutschland's unaudited interim consolidated financial statements for the three month period ended 31 March 2014 can be located at:

http://ir.Sky.de/cgi-bin/show.ssp?id=3100201401&companyName=Sky&language=English

 

 

Appendix 3 - Enlarged Group Financials

 

Benefits of scale: 20 million customers and revenue of £11 billion

(millions, unless stated3)

BSkyB1

Sky Deutschland1

Sky Italia1

Enlarged Group

Addressable homes

30

422

25

97

Customer penetration %

38%

9%

19%

21%

Customers

11.5

3.7

4.8

20

Subscription products

34.8

6.0

6.7

48

Revenue

£7.6bn

£1.3bn

£2.3bn

£11.2bn

 

1. For the year to or as at 30 June 2014 for BSkyB, Sky Deutschland 31 March  2014 and Sky Italia 30 June 2013.

2. 42m homes in Germany (39m) and Austria (3m). Sky Deutschland AG  products includes HD paying premium only.

3. Revenue of Germany and Italy converted at exchange rate of €1.25:£1 as at 23 July 2014; BSkyB and Sky Italia accounts applying IFRS and BSkyB policies, Sky Deutschland AG accounts applying IFRS and Sky Deutschland AG policies.

 

Enlarged group financials

£m1

BSkyB

30 Jun-142

Sky Deutschland

31 Mar-142

Sky Italia

30 Jun-142

Sky Enlarged Group3

Revenue

7,617

1,282

2,270

11,169

Programming

(2,662)

(757)

(1,147)

(4,565)

Operating costs

(3,695)

(582)

(1,052)

(5,329)

EBITDA4

1,667

16

250

1,933

EBIT

1,260

(57)

71

1,274

OpFCF

1,124

(72)

109

1,161

Net Debt




5,533

Net debt/EBITDA ratio




2.9x

 

1. Results of Germany and Italy converted at exchange rate of €1.25:£1

2. The combined figures do not comprise proforma financial information and are based on different    accounting policies and financial information provided at and for periods ended at different dates. BSkyB and Sky Italia. accounts applying IFRS and BSkyB policies, Sky Deutschland AG accounts applying IFRS and Sky Deutschland AG policies.  Sky Italia based on unaudited information received from  management and is subject to final confirmation.  All figures 12 months ending 

3. "Enlarged Group" is the arithmetic aggregation of three entities. The information in relation to Sky Deutschland AG  is based on public information extracted without material adjustment from Sky Deutschland AG's  consolidated financial statements for the year ended 31 December 2013.  Net debt is on the basis of 57% take up of Sky Deutschland AG.  

4. To better reflect the ongoing run-rate Sky Italia excludes the one-off impact of 2014 Winter Olympics which results in an increase in EBITDA of £30 million

.

Appendix 4 - Risk Factors

1.         Risks relating to the Transaction

The Transaction or part of the Transaction may not proceed

The Transaction is conditional upon the satisfaction or, if applicable, waiver of certain conditions precedent (including, amongst other things, the approval of the Independent Shareholders and receipt of relevant antitrust/ merger control and regulatory clearances). The parties to the Sale and Purchase Agreements also have certain termination rights.

There can be no assurance that any of the conditions will be satisfied or, if applicable, waived or that the termination rights will not be exercised.

Additionally, the National Geographic Channel Transfer is conditional upon the completion of the Sky Italia Acquisition and the Sky Italia Acquisition is, in turn, conditional upon completion of the Sky Deutschland Acquisition. In the event that the Sky Deutschland Transaction completes but the Sky Italia Acquisition does not complete, the Company may forego the long term benefits in connection with completion of the entire Transaction.

The value of the consideration payable by BSkyB in respect of the Transaction may increase due to currency fluctuations

BSkyB's reporting currency is Sterling. However, the substantial majority of the cash consideration payable by BSkyB for the Sky Deutschland Acquisition and the Sky Deutschland Offer is in Euros and the Sterling-Euro exchange rate fluctuates continuously. BSkyB is therefore exposed to currency fluctuation risks which may mean that the value of the consideration actually payable in Euros may be materially greater (or lower) than the amount expected as the date of the Announcement. While BSkyB attempts to manage a proportion of foreign transaction exchange risks, there can be no assurance that BSkyB will or will be able to hedge successfully any or all of its foreign exchange risk in relation to the consideration payable in respect of the Sky Deutschland Acquisition and the Sky Deutschland Offer.

The Company has not had access to Sky Deutschland's non-public information save for certain limited information

The Company requested access to Sky Deutschland's non-public information from Sky Deutschland shortly before the publication of this Announcement. The Company has not been given such access save for limited information relating to change of control provisions in certain contracts and financing agreements. Therefore the Enlarged Group may be exposed to unknown liabilities or obligations of Sky Deutschland, which may adversely affect the Enlarged Group. In addition, Sky Deutschland's management has not provided any supporting materials to the Company with respect to any Sky Deutschland information contained or referred to in the Announcement. Accordingly the information relating to Sky Deutschland contained or referred to herein has not been independently verified by BSkyB plc.

The Enlarged Group may not be able to use Sky Deutschland's tax losses

According to page 150 of Sky Deutschland's Annual Report and Accounts for the year ended 31 December 2013, in November 2012 Sky Deutschland received an advanced ruling from the Munich tax authorities granting approval on the general technical approach regarding the application of the hidden reserve clause of the German Corporate Income Tax Act to protect German tax losses and tax loss carry-forwards in the event of certain changes to Sky Deutschland's shareholder structure (e.g., increase of the shareholding of 21st Century Fox Adelaide to 54.45% on 15 January 2013). Sky Deutschland's Annual Report and Accounts for the year ended 31 December 2013 further states that, while the Munich tax authorities only issued comments on the methodology for the determination of hidden reserves and did not comment on valuation results, the management believed that pursuant to the Munich tax ruling Sky Deutschland should be able to retain a significant part of its current German tax losses and tax loss carry-forwards in the event of relevant changes to Sky Deutschland's shareholder structure.

Notwithstanding the statements made by Sky Deutschland there is a risk that, following completion of the Sky Deutschland Transaction, the Enlarged Group will be prevented from using these tax losses as a consequence of the Sky Deutschland Transaction.

A downgrade in credit ratings may adversely affect the Enlarged Group

Following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition the Company expects that due to the increased indebtedness and financial leverage of the Enlarged Group its credit ratings will be downgraded, potentially by more than one notch (although the Company still expects to be able to maintain a credit rating which will qualify as an investment grade credit rating. This and any future downgrade in the Enlarged Group's credit ratings which may occur may adversely affect the Enlarged Group's ability to access capital and would likely result in more stringent covenants and higher interest rates under the terms of any new indebtedness incurred after the announcement date.

Change of control pursuant to the Transaction

Both Sky Deutschland and Sky Italia have business related agreements and Sky Deutschland also has certain financing agreements which contain change of control clauses that entitle the relevant counterparties to repayment (in the case of the financial contracts) or to terminate or enforce other rights under the agreements (in the case of the business contracts) if a third party acquires a majority stake in or gains control through other means over Sky Deutschland or Sky Italia S.r.l. as applicable. Following completion of each of the Sky Deutschland Acquisition and the Sky Italia Acquisition, such counterparties may seek to exercise these rights or seek to provide consent to the change of control on unfavourable terms.  The financing arrangements for the Transaction are expected to be sufficient to provide funds for repayment of any indebtedness of Sky Deutschland which becomes due and payable as a result of these change of control provisions in the financing agreements, and Sky Italia will be sold to the Company on a debt and cash free basis, subject to the working capital adjustment mechanism under the terms of the Sky Italia SPA, and there will therefore be no debt obligations which will need to be refinanced. However, the termination of business contracts at Sky Deutschland or Sky Italia could materially or adversely affect their business, which in turn could have an adverse impact on the business, results of operations and financial condition of the Enlarged Group.

If the Transaction does not proceed, early redemption charges may be payable in respect of any bonds or notes issued to finance the Transaction

The Company intends to access the debt capital markets in connection with financing of the Transaction. The Company may from time to time choose to further access the capital markets either before or after the new bank facilities are drawn under the Facilities Agreement if pricing or other terms are considered attractive. To the extent that BSkyB has issued or issues such debt for the purposes of the Transaction prior to completion of the Sky Deutschland Transaction and the Sky Italia Acquisition, and the Transaction does not substantially complete in its entirety, certain of the bonds or notes issued to finance part of the Transaction may be subject to a special mandatory redemption or the Company may have to pay early redemption charges to repay such debt before its stated maturity. The Company may be unable to effect such redemption because it may not have available funds at the time, which, in the case of a special mandatory redemption, may lead to an event of default under the bonds or notes. In addition, there may be additional costs associated with terminating any hedging arrangements entered into in connection with the bonds or notes.

The Enlarged Group may not realise the anticipated benefits and synergies of the Transaction

The Enlarged Group may not realise the anticipated benefits and synergies that the Company expects will arise as a result of the Transaction as set out in more detail in paragraph 8 of the Announcement. The Company may also encounter difficulties in achieving these anticipated benefits and synergies in accordance with anticipated timeframes and/or such benefits and synergies may not materialise in part or at all. 

The National Geographic Channel Transfer is conditional upon the completion of the Sky Italia Acquisition and the Sky Italia Acquisition is, in turn, conditional upon the satisfaction or waiver (as applicable) of the conditions to the Sky Deutschland Acquisition. The Sky Deutschland Acquisition is subject to the same conditions precedent to completion as the Sky Deutschland Offer and will close on the Sky Deutschland Offer Settlement Date. The Sky Deutschland Acquisition, the National Geographic Channel Transfer and the Sky Italia Acquisition are structured as part of a single transaction and are intended to complete together. If certain conditions of the Sky Italia Acquisition which are not conditions under the Sky Deutschland Acquisition and Sky Deutschland Offer are not fulfilled (or termination rights arise under the Sky Italia Acquisition), it is possible that the Company could complete the Sky Deutschland Acquisition and the Sky Deutschland Offer, but the Sky Italia Acquisition and the National Geographic Channel Transfer could complete at a later date or not at all. In these circumstances the anticipated synergies and benefits attributable to the Sky Italia Acquisition would either: (1) not be realised until after completion of the Sky Deutschland Transaction which may adversely affect the business, results of operations and financial condition of the Enlarged Group; or (2) not materialise at all, which may adversely affect the business, results of operations and financial condition of the Enlarged Group. In particular, in the event that the Sky Italia Acquisition does not complete, the revenue synergies anticipated by the Company would not be realised.

2.         Risks relating to BSkyB

Further information on the material risks which generally affect BSkyB is set out on pages 24 to 27 of the Company's Annual Report and Accounts for the year ended 30 June 2013 (as updated in the Company's interim results for the six months ended 31 December 2013).

3.         Risks relating to the Enlarged Group which result from or are impacted by the Transaction

The Enlarged Group will have a broader geographical spread and will be larger in scale

The scale of the Enlarged Group will be increased following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition and it will have a broader geographical spread in Europe. As a result of the increased scale and broader geographical spread, the Enlarged Group will be exposed to (all or some of) the German, Austrian, Italian, Swiss and Luxembourg markets which will present different challenges to those currently faced in the UK and Ireland, including:

·      exposure to markets with differing levels of maturity together with new competitors, new licensors and different terms for key content renewal arrangements;

·      exposure to new domestic legislation, regulations, policies and regulators in Germany, Austria, Italy, Switzerland and Luxembourg;

·      exposure to different customer expectations and economic conditions in the German, Austrian, Italian, Swiss and Luxembourg markets which will be important due to the reliance of the business of the Enlarged Group on consumer spending; and

·      BSkyB's management having greater responsibilities due to the size of the Enlarged Group, potentially diverting management's attention from focusing solely on the current business and operations of BSkyB.

If the Enlarged Group cannot effectively manage exposure to these challenges, this could have a material adverse effect on the Enlarged Group's business, financial condition, results of operations and prospects.

The Enlarged Group will have an increased exposure to foreign exchange risk

The Enlarged Group will present its financial results in pounds Sterling. As a result of: (i) the Transaction; (ii) the resulting increased portion of assets, liabilities, earnings and costs denominated in Euros; and (iii) the increased level of content costs denominated in U.S. Dollars, the operational and financial results of the Enlarged Group will be more sensitive to fluctuations in the exchange rate of Sterling against the Euro and Euro against the U.S. Dollar.  Depreciation of the Euro relative to Sterling and U.S. Dollar could have an adverse impact on the consolidated financial condition and results of operation of the Enlarged Group.

Following Completion, the indebtedness and financial leverage of the Enlarged Group will increase

The Company intends to access the debt capital markets in connection with financing of the Transaction. Further borrowings may take the form of borrowings under the Facilities Agreement or debt issuances in the capital markets, or a combination thereof. Consequently, the Transaction will increase the overall indebtedness and financial leverage of the Enlarged Group, which will result in increased repayment commitments and borrowing costs. This could limit the Enlarged Group's commercial and financial flexibility, causing it to reprioritise the uses to which its capital is put to the potential detriment of its business. Therefore, depending on the level of the Enlarged Group's borrowings, prevailing interest rates and exchange rate fluctuations, this could result in reduced funds being available for expansion, dividend payments and other general corporate purposes.

Following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition the Enlarged Group may be unable to refinance the Facilities Agreement in order to provide longer-term financing

On 25 July 2014, the Company entered into the Facilities Agreement, comprising Term Loan A, Term Loan B and the RCF, as further described above. The Company's ability to refinance indebtedness under the Facilities Agreement, including Term Loan A which has the shortest maturity (if drawn), will in part depend on its financial condition at that time. Furthermore, the Company may be unable to find alternative financing, and even if the Company could obtain alternative financing, it might not be on terms that are favourable or acceptable to the Enlarged Group. For example, any refinancing could be at higher interest rates, which could restrict the business, results of operations and financial condition of the Enlarged Group. Any inability to refinance such debt on commercially acceptable terms may have a material adverse effect on Enlarged Group's business, results of operations, financial condition or prospects.

4.         Risks relating to the Ordinary Shares

The Company's share price may fluctuate and may not deliver a return

The share prices of publicly quoted companies can be highly volatile and shareholdings illiquid. The market price of the Ordinary Shares may be subject to wide fluctuations in response to many factors, including variations in the operating results of the Company, divergence in financial results from analysts' expectations, changes in earnings estimates by stock market analysts, general economic conditions, legislative changes in the Company's sector and other events and factors outside of the Company's control. Ordinary shares may not be a suitable investment for all prospective shareholders and before acquiring the Ordinary Shares investors should take their own independent advice. In the event of a winding-up of the Company, the Ordinary Shares will rank behind any liabilities of the Company and therefore any return for Shareholders will depend on the Company's assets being sufficient to meet the prior entitlements of creditors.

Shareholders may be exposed to fluctuations in currency exchange rates

The Ordinary Shares, and any dividends to be announced in respect of such Ordinary Shares, will be quoted in Sterling. An investment in Ordinary Shares by an investor in a jurisdiction whose principal currency is not Sterling exposes such investor to foreign currency rate risk. Any depreciation of the Sterling in relation to such foreign currency will reduce the value of the investment in the Ordinary Shares in foreign currency terms and may adversely impact the value of any dividends.

Substantial future sales or offerings of Ordinary Shares could impact on the market price of Ordinary Shares

The Company cannot predict what effect, if any, future sales of Ordinary Shares, or the availability of Ordinary Shares for future sale, will have on the market price of Ordinary Shares. It is also possible that the Company may decide to offer additional Ordinary Shares in the future (for example to finance corporate acquisitions) which would dilute investors' shareholding in the Company. Sales or offerings of substantial amounts of Ordinary Shares in the future, or the perception or any announcement that such sales or offerings could occur, could adversely affect the market price of Ordinary Shares and may make it more difficult for investors to sell their Ordinary Shares at a time and price which they deem appropriate.

The Company's ability to pay dividends on the Ordinary Shares in the future is not guaranteed

While the Company has historically paid dividends to Shareholders and the Company intends that the Enlarged Group will maintain a progressive dividend policy following completion of the Sky Deutschland Transaction and the Sky Italia Acquisition, the declaration and payment of any dividends in the future and the amount of any future dividends will depend upon the results of operations, financial conditions, cash requirements, future prospects, profits available for distribution and other factors deemed by Directors to be relevant at the time.

 

Appendix 5 - Information on the expected impact of the Transaction on the assets and liabilities of the Enlarged Group

1.         Financial effects of the Transaction

The Company's preliminary consolidated financial statements for the year ended 30 June 2014 have been prepared in accordance with IFRS.

Although Sky Deutschland also prepares its audited consolidated financial statements in accordance with IFRS, the Company has not had access to Sky Deutschland's non-public information to enable it to determine whether there are significant differences between the Company's policies and those adopted by Sky Deutschland that might be material to Sky Deutschland's financial information.

As such the Company does not have sufficient information to enable it to prepare a reconciliation to reflect adjustments to Sky Deutschland's historical financial information to restate the information on a basis consistent with the Company's accounting policies.

The Company has restated the summary of financial information for Sky Italia in accordance with the Company's accounting policies in paragraph 4 of the Announcement.

The information below is provided to describe how the Transaction might affect the Company's net assets.

2.         Impact of the Transaction

2.1       Financing

The Transaction will be financed through a combination of new debt facilities, the sale of bonds in the debt capital markets (with expected cost of any new debt at approximately less than 4.5% p.a.), existing cash resources (including cash raised by the Equity Placing and the National Geographic Channel Transfer, as set out in paragraph 8 of this Announcement.

If all of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, the total net consideration, after deducting the consideration due for the National Geographic Channel Transfer, amounts to £7.0 billion, subject to the working capital adjustment mechanism under the terms of the Sky Italia SPA.  This will result in an increase to BSkyB's cash and borrowings of £5.1 billion from the amount of debt raised less associated expenses. 

If none of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, the total net consideration after deducting the consideration due for the National Geographic Channel Transfer amounts to £4.9 billion, subject to the working capital adjustment mechanism under the terms of the Sky Italia SPA. This will result in an increase to BSkyB's cash and borrowings of £3.0 billion from the amount of debt raised less associated expenses.

2.2       Payment of consideration

If all of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, BSkyB's total cash will decrease by:

·      £5.0 billion upon payment, at completion of the Sky Deutschland Transaction, of the cash consideration for the Sky Deutschland Transaction; and

·      £2.07 billion upon payment, at completion of the Sky Italia Acquisition, of the cash consideration for the Sky Italia Acquisition, after deducting the consideration due for the National Geographic Channel Transfer (subject to adjustment pursuant to the working capital completion adjustment mechanism under the terms of the Sky Italia SPA).

If none of the Sky Deutschland Minority Shareholders accept the Sky Deutschland Offer, BSkyB's total cash will decrease by:

·      £2.9 billion upon payment, at completion of the Sky Deutschland Transaction, of the cash consideration for the Sky Deutschland Transaction; and

·      £2.1 billion upon payment, at completion of the Sky Italia Acquisition, of the cash consideration for the Sky Italia Acquisition, after deducting the consideration due for the National Geographic Channel Transfer (subject to adjustment pursuant to the working capital completion adjustment mechanism under the terms of the Sky Italia SPA).

Consideration for the Sky Italia Acquisition will be paid in Sterling. Consideration for the Sky Deutschland Transaction will be paid in Euros. Consideration for the National Geographic Channel Transaction will be paid in US Dollars. The £ figures above are based on the £ to € and US$ exchange rates as derived from Bloomberg on 23 July 2014.

Details of the risks associated with currency fluctuations are set out in Appendix 4 of this Announcement.

2.3       Sky Italia Acquisition

The illustrative effect on BSkyB's balance sheet as at 30 June 2014, on the basis of Sky Italia's latest historical financial information restated on a basis consistent with the Company's accounting policies and translated at an exchange rate of €1.25:£1 is estimated as follows:

·      An increase to non-current assets of £791 million and to current assets of £628 million;

·      An increase to current liabilities of £726 million and to non-current liabilities of £106 million; and

·      An increase to net assets of £586 million.

The Directors have not completed their purchase price allocation process to enable them to allocate the purchase price between goodwill and the net assets of Sky Italia. The fair value of Sky Italia's net assets will be determined as at the date of completion of the Sky Italia Acquisition based on independent valuations. In addition, the figures set out above for the consideration for the Sky Italia Acquisition are subject to the working capital adjustment mechanism under the terms of the Sky Italia SPA. Accordingly, the amount of goodwill may increase or decrease depending on the consideration that is paid.

2.4       Sky Deutschland Transaction

The effect on the Company's balance sheet is as follows:

·              Consolidated assets are estimated to increase on a line-by-line basis, being the recognition of Sky Deutschland's tangible and separately identifiable intangible assets at their fair value on acquisition;

·              Goodwill would be recognised, being the excess of the fair value of the purchase consideration (comprising the cash consideration and the associated costs) over the fair value of Sky Deutschland's net assets (excluding minority interests). The Directors have not completed their purchase price allocation process to enable them to allocate the purchase price between goodwill and the net assets of Sky Deutschland. The fair value of Sky Deutschland's net assets will be determined as at the date of completion of the Sky Deutschland Transaction;

·              Consolidated liabilities are estimated to increase on a line-by-line basis, being the recognition of Sky Deutschland's liabilities (including contingent liabilities to be recognised in accordance with IFRS 3). Interest bearing liabilities would be reduced to the extent that they are refinanced upon acquisition.



 

Appendix 6 - Financial Projections for Sky Italia and Sky Deutschland

The following financial projections were made in relation to Sky Deutschland and Sky Italia:

·      in Sky Deutschland's preliminary 2013 results dated 6 February 2014 Sky Deutschland disclosed the following statement: "For 2014 Sky Deutschland expects subscriber net growth of 400k to 450k, and full year EBITDA in the range of €70m to €90m, supported by a continued strong increase in total revenues"; and

·      at 21st Century Fox's Investor Day on 8 August 2013 21st Century Fox made the following verbal statement in relation to 21st Century Fox's Direct Broadcast Satellite TV segment: "By 2016, we are forecasting at least the doubling of the Satellite TV segment's EBITDA levels over 2013 from improvements at Sky Italia and achieving significant subscriber gains at Sky Deutschland"

 (together the "Financial Projections").

As:

·      the Company has not made the Financial Projections and was not involved in the preparation and review of the Financial Projections;

·      the Company has not had sufficient access to Sky Deutschland's non-public information to enable it to assess the significance of the differences between the policies adopted by BSkyB and those adopted by Sky Deutschland that might be material to Sky Deutschland's financial information; and

·      the second projection outlined above was made for 21st Century Fox's Direct Broadcast Satellite TV segment and not separately in relation to either of Sky Italia or Sky Deutschland,

the Company is unable to confirm the accuracy, reasonableness, validity or completeness of the Financial Projections or the estimates and assumptions that underlie them.

Having reviewed Sky Deutschland's publicly-available financial information, the Company believes that there are certain factors that could contribute to the Financial Projections not being relevant to the position of Sky Deutschland under the Company's ownership:

·      potential changes to the financial and operational management of the Enlarged Group under the Company's ownership;

·      a change to the functional currency of Sky Deutschland from Euros to £, which could have a material effect on the Financial Projections; and

·      the fact that the Company reports under IFRS and the Financial Projections are believed to have been prepared under US GAAP.

The Company will consider whether the Financial Projections are valid upon being given sufficient access to Sky Deutschland.

At the date of this Announcement, neither the Company nor its advisers accepts responsibility for the accuracy, reasonableness, validity or completeness of the Financial Projections or the estimates and assumptions that underlie them.

The Financial Projections were not intended for publication by the Company and should not be regarded as forecasts of profits given by the Company or any of the Directors and accordingly have not been prepared to the standard required in producing a profit forecast in the context of the Transaction. They should not be relied upon in connection with any decisions related to the Company, the Ordinary shares or the Transaction.



 

 

Appendix 7 - Definitions

"21st Century Fox"

21st Century Fox Inc., a company incorporated in Delaware, with its principle place of business at 1211 Avenues of the Americas, New York, New York 10036, USA

"21st Century Fox Adelaide"

21st Century Fox Adelaide Holdings B.V., the legal owner of 57.4% of the ordinary share capital of Sky Deutschland on a fully diluted basis (assuming the exercise by 21st Century Fox Adelaide Holdings B.V., of its conversion rights pursuant to the Convertible Bond)

"21st Century Fox Affiliated Directors"

Chase Carey, David DeVoe, James Murdoch and Arthur Siskind

"21st Century Fox Nominees"

21st Century Fox UK Nominees Limited, a wholly owned subsidiary of 21st Century Fox and the legal holder Ordinary Shares representing 39.14% of the Company's issued share capital

"Barclays"                          

Barclays Bank PLC, acting through its Investment Bank

"Bloomberg"

a privately held company that acts as a provider of business and financial information

"Board" or "Directors"

the directors of BSkyB plc

"BSkyB" or the "Company"

British Sky Broadcasting Group plc a company incorporated in England, and which has its registered office at Grant Way, Isleworth, Middlesex TW7 5QD

"Circular"

the class one and related party transaction circular in connection with the Transaction

"Convertible Bond"

the convertible four-year bond issued by Sky Deutschland to 21st Century Fox Adelaide in January 2011 with a principal amount of €164.6 million and a cash coupon of 5.5% per annum, payable quarterly in arrears, which can be converted into 53,914,182 Ordinary Shares from  capital

"Disclosure Rules" or "DTR"

the disclosure and transparency rules made by the UKLA under Part VI of FSMA

"EBITDA"

earnings before interest, taxation, depreciation and amortisation

"Enlarged Group"

Sky as enlarged by the Sky Deutschland Transaction, and if applicable the Sky Italia Acquisition (including the National Geographic Channel disposal)

"Equity Placing"

has the meaning given to it in paragraph 1 of the Announcement

"Facilities"

has the meaning given to it in paragraph 8 of the Announcement

"Facilities Agreement"

has the meaning given to it in paragraph 8 of the Announcement

"Financial Conduct Authority" or "FCA"

the Financial Conduct Authority of the United Kingdom

"Frankfurt Stock Exchange"

the Stock Exchange located in Frankfurt, owned and operated by Deutsche Börse

"FSMA"

the Financial Services and Markets Act 2000 (as amended)

"General Meeting"

 

the general meeting of the Company in connection with the Transaction or any adjournment of it

 

"German Corporate Income Tax Act"

 

the Körperschaftssteuergesetz, 15 October 2002, as amended, and any supplementary administrative orders in force under it

 

 

"German Takeover Act"

the German Securities Acquisition and Takeover Act (Wertpapiererwerbs und Übernahmegesetz), which came into force on January 1 2002, and any supplementary administrative orders in force under it

"HD"

high definition

"IAS"

International Accounting Standards

"IFRS"

International Financial Reporting Standards

"Independent Directors"

the Directors excluding the 21st Century Fox Affiliated Directors and Matthieu Pigasse

"Independent Shareholders"

Shareholders other than 21st Century Fox Nominees and its associates

"IPTV"

internet protocol television

"Listing Rules" or "LR"

the listing rules made by the UKLA under Part VI of FSMA

"MDAX Index"

German stock exchange ranking below the DAX, run by Deutsche Börse

"Morgan Stanley"

Morgan Stanley & Co. International plc

"National Geographic Channel"

NGC Network International LLC and NGC Network Latin America LLC

"National Geographic Channel Purchasers"

21st Century Fox-NGC (International) Holdings, Inc. and 21st Century Fox International Channels (US) Inc.

"National Geographic Channel SPA"

the sale and purchase agreement between Sky Ventures Limited and National Geographic Channel Purchaser for the units in National Geographic Channel

"National Geographic Channel Transfer"

has the meaning given to it in paragraph 1 of the Announcement

"Non-Independent Directors"

the 21st Century Fox Affiliated Directors and Matthieu Pigasse

"Ofcom"

the Independent regulator and competition authority for the UK communications industries

"Ordinary Shares"

the ordinary shares of £0.50 each in the capital of the Company

"OTT"

'over the top' content, delivered over the internet without the use of a satellite or cable intermediary

"PVR"

personal video recorder

"RCF"

has the meaning given to it in paragraph 7 of the announcement

"Sale and Purchase Agreements" or "SPAs"

the agreements governing the Sky Italia Acquisition, the Sky Deutschland Acquisition and the National Geographic Channel Transfer

"Shareholder"

a holder of Ordinary Shares

"Sky Deutschland"

 

Sky Deutschland AG, a company registered in Germany and traded on the Frankfurt Stock Exchange

 

"Sky Deutschland Acquisition"

has the meaning given to it in paragraph 1 of the Announcement

"Sky Deutschland Minority Shareholders"

has the meaning given to it in paragraph 1 of the Announcement

"Sky Deutschland Offer"

has the meaning given to it in paragraph 1 of the Announcement

"Sky Deutschland Offer Document"

has the meaning given to it in paragraph 1 of the Announcement

Sky Deutschland Offer Settlement Date

the date on which the transfer by the settlement agent of the Sky Deutschland shares tendered pursuant to the Sky Deutschland Offer to Sky GmbH occurs, to occur simultaneously with the payment of the aggregate price payable by Sky GmbH pursuant to the Sky Deutschland Offer to the relevant custodian bank, should there be more than one settlement, the first settlement shall suffice.

"Sky Deutschland SPA"

the agreement between 21st Century Fox Adelaide and a wholly owned subsidiary of the Company for the sale and purchase of 21st Century Fox Adelaide's shareholding in Sky Deutschland

"Sky Deutschland Transaction"

has the meaning given to it in paragraph 1 of the Announcement

"Sky Italia"

Sky Italia S.r.l. and its subsidiary undertakings

"Sky Italia Acquisition"

has the meaning given to it in paragraph 1 of the announcement

"Sky Italia SPA"

the sale and purchase agreement between a wholly owned subsidiary of the Company and a wholly owned subsidiary of 21st Century Fox for the purchase and sale of  Sky Italia S.r.l.

"Sky Italia S.r.l."

Sky Italia S.r.l, a private company incorporated in Italy

"Sky Ventures"

Sky Ventures Limited

"Subsidiary Undertaking"

has the meaning given to it in s. 1159 of the Companies Act  2006

"Term Loan A"

has the meaning given to it in paragraph 8 of this Announcement

"Term Loan B"

has the meaning given to it in paragraph 8 of this Announcement

"Transaction"

has the meaning given to it in paragraph 1 of the Announcement

"UKLA"

the FCA acting in its capacity as competent authority for the purposes of FSMA

 

 

 



[1] The value of the National Geographic Channel stake is fixed in US$ and converted to sterling, based on the £ to US$ exchange rate as derived from Bloomberg on 23 July 2014 (£1 to US$1.7035)

 

[2] Please refer to Appendix 3

[3] The value of the National Geographic Channel stake is fixed in US$ and converted to sterling, based on the £ to US$ exchange rate as derived from Bloomberg on 23 July 2014 (£1 to US$1.7035)

 

[4] The value of the National Geographic Channel stake is fixed in US$ and converted to sterling, based on the £ to US$ exchange rate as derived from Bloomberg on 23 July 2014 (£1 to US$1.7035)

 

[5] Adjusted EBITDA, excludes exceptional and non-recurring items. To better reflect the ongoing run-rate adjusted EBITDA the one-off impact of 2014 Winter Olympics

     is excluded, which results in an increase in EBITDA of €38 million.

[6] The value of the National Geographic Channel stake is fixed in US$ and converted to sterling, based on the £ to US$ exchange rate as derived from Bloomberg on 23 July 2014 (£1 to US$1.7035)

 

[7] £200 million pa valued at BSkyB's LTM EV/EBITDA of 9.2x

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
ACQSEFSIIFLSELW