BSkyB: BSkyB’s robust results are a reminder of just why part-owner News Corp was so keen on a buyout. With that bid all but dead, here is real financial pain caused by its hacking scandal. The UK broadcaster is reaping the rewards of heavy investment. Free cash flow surged more than 50 per cent in the year to June, and earnings per share, excluding one-offs, climbed 30 per cent. A 16 per cent rise in revenues to £6.6 billion, and a 23 per cent jump in adjusted operating profit to 1.1 billion, narrowly beat analysts' forecasts. Though media rivals and politicians fretted over the wisdom of the News Corp buyout, BSkyB shows no sign of having been distracted.
Calls for a special cash return, as compensation for the share price disappointment that accompanies the withdrawal of News Corp's bid, were answered. But a £750-million share buyback falls sensibly short of the most bullish calls for a payout of 2 billion or more. Sky is a growth business and needs to keep dry powder for deals and investments in programming and technology. Unless shares are trading at bargain levels, buybacks are a questionable use of corporate funds anyhow.
Valuing BSkyB isn't straightforward. Drawing comparisons is tricky, since it enjoys a more dominant position than US peers or smaller UK rival Virgin Media, and is less reliant on advertising than, say, ITV. Still, BSkyB’s results certainly don’t suggest it's overvalued. The shares are up a quarter since the original approach, even accounting for a slide after News Corp walked away. But that's half the average rise logged by Virgin, ITV and rival broadband provider BT over the same time.
With adjusted EPS of 41.6 pence, BSkyB shares trade on a price-earnings multiple of about 17.3 times, or about a 15 per cent premium to the wider FTSE-350. That looks reasonable, given BSkyB’s comparative resilience in the face of weak British economic growth and consumer spending.
It's not quite a utility, but many viewers would rather scrimp elsewhere than miss out on football, films and Boardwalk Empire. Shares are just below 720 pence, a level that vindicates the board's decision to reject News Corp's 700 pence-a-share approach. It's hard to believe there’s a whole load of bid froth in the stock now. If News Corp came back, even a standard 30-odd per cent premium would imply a takeout price of 950 pence. If BSkyB continues to perform, it could be considerably more.