Premiere rights issue questioned

[BGonaSTICK]

German pay-TV broadcaster Premiere, along with its new CEO Michael Börnicke, is about to raise €250m of fresh capital. Not everyone is happy .

Investment bankers Dresdner Kleinwort, while recommending investors hold Premiere stock, issued a note August 29 questioning why Premiere needed the cash. “Foremost in our minds is why raise equity capital ahead of a content auction when there will almost certainly be no other bidders and when the company should be debt free by 2009?” asked the note. “The two conclusions investors might draw are either the company will seek to buy IPTV and even free-to-air rights as well as cable/satellite rights, or that cash consumption will continue, not reverse, in the next few quarters. The rights issue reduces our confidence in our forecast that Premiere will pay €240m per annum for Bundesliga broadcast rights, and we see the lack of visibility acting as a drag on the shares until the outcome is known around the turn of the year.”

Premiere says it will use the cash to increase financial and strategic flexibility in connection with “bidding for content rights”. Kleinwort, in a strongly worded note, asks why Premiere needs this cash. After all its net debt (€326m as at June 30) is modest. It also has a €550m line of credit. The broadcaster has already said that its net debt will peak in the first half of the year, and then fall during the 2H. “So even if it went to the limit of its credit facility, its leverage would be a maximum of 3x at the end of this year,” argues the bank.

Moreover, unless some surprise bidder emerges, it is already known that the current soccer rights holder Unity Media (which is paying €240m a year) will not be bidding in the next auction round for soccer, and the bidding will not be competitive. The bank says there are two possible reasons why Premiere might need the extra buffer the fresh cash will provide. First, t he soccer rights might be more expensive than the market expects, and suggests that Premiere intends going after IPTV rights and perhaps even free-to-air rights as well as the more normal cable/satellite rights. Reason two is that Premiere’s cash consumption will continue during this half-year, and the bank asks why, with subs rising and positive EBITDA, will the extra cash be needed?

Nevertheless, the bank is raising its long-term forecasts on Premiere, and predicts steady subscriber growth to 4.7m by 2010, 4.98m in 2011 and 5.5m in 2014. The bank’s report even warns that Premiere might be a ripe take-over target. “We think Premiere’s ongoing low core margins should make the business a more attractive acquisition target, in particular for international pay-TV operators. If we are correct to say the long-term margins Premiere will achieve from its core satellite and cable customers are in the 12%-13% range, this is significantly below the equivalent “best-in-class” margins earned by BSkyB in the UK. In 2009, we forecast Sky will generate a 24% EBITDA margin in its pay-TV business. An international pay-TV operator might take the view that it could improve Premiere’s margins from efficiencies in fixed programming costs or from variable receiver costs. These could be achieved from pooled buying of content and hardware if Premiere were part of a larger pan-European pay-TV group.”

Source: RapidTV