Stock of the day More relief for BT than Sky from channel share deal
The timing of BT and Sky’s content cross-supply deal is telling. The next auction for UK Premier League rights is likely to take place in February. There’s no guarantee that allowing each other’s customers to sign-up for rival sports offerings will produce a tacit limit on bidding. Nor are we likely to see the total price tag for Premier League rights come down compared to the $5bn package ending in 2019. However, the contract is a symbolic step away from the logical conclusion of BT and Sky’s battle to cater for ravenous and hugely profitable European sports appetites. Mutual dependence indicates mutual value destruction if winning bids were to continue increasing at the eye watering pace of the last five years. By extension, we can expect the rate at which the cost of rights rise from here and how future packages are structured to present more manageable demands on BT’s and Sky’s capital allocation.
But it is BT that needs this deal more than Sky. Structural revenue decline at the UK’s dominant fixed-line telecom is widely recognised. It can’t escape chronically intense capital commitments unless it throws in the towel on an effective infrastructure monopoly; which is unlikely to happen. That’s why investors will continue to revisit the soundness of its dividend plans for years to come, even after the group’s reaffirmed pledge, in November, to maintain progressive pay-outs. With BT’s TV growth showing signs of a plateau, plus separate pressures—an Ofcom fine, Italy, a settlement with Deutsche Telekom, plus other issues—the British group is in no position to ratchet up competitive content investment. Far more sensible to lower the temperature, particularly as Wall St runs the numbers on potential new sports rights bidders, like Facebook, Amazon and others.
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Assuming a similar 30% hike in BT’s payment as seen in 2015 for a third of Premier League rights, the group could be on the hook for at least £1.2bn. BT might even be prepared to see its share of matches slip from the 42 games agreed last time. After all, it already has exclusive three-year rights for European football, rights for the FA Cup and other non-football tournaments, to help keep sports viewers sticky. However, trimmings around the whole package will now probably present an increasingly compelling service for the league, designed to raise barriers to entry for newcomers. The aim would be to forestall another 70% hike in total cost like those seen at each of the last two Premier League auctions. That will be a relief for BT, including CEO Gavin Patterson, under whose watch BT entered the high-stakes sports arena.
From a technical analysis perspective, the beauty of BT's chart is of course the simplicity and clarity of the downtrend, though it has been an unpleasant almost two years for investors. Escaping from falling trend channel will be crucial for sustained upside, though everything about this chart calls for a continuation of the prevailing direction. At the time of writing the stock was above the upper falling trend line though that has not been unusual during the duration of its existence. As per previous instances, momentum (see RSI sub-chart which recently posted a thin--i.e.--brief spike into the overbought zone) looks calibrated for a failure right at the edge of the moat, suggesting the stock will revert into the channel in the very short term. The stock has set progressively lower lows since July 2016. Before that, it set one higher low over a decline lasting from December 2015 to late July 2016, so the overall falling trend is longer. At the time of writing, the share was butting up against (slightly above, in fact) apparent resistance from a kick-back low at 276.6p on 22nd June 2016. The up leg which ensued from that low failed at the channel wall. Price could even exceed our expectations from here, though we don't think by much, looking at the overall slump, represented by the 200-day moving average (blue). Below 277 would signal reacceleration of the fall, and the pace would pick up further on re-entry to the down channel. If we are wrong and 277p holds, the watch would move on to the next similar resistance at 298p.
Figure 1. - BT Group share price chart (daily intervals)
Source: Thomson Reuters and City Index
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