BT Group (LSE: BT-A) has been transforming itself into a content provider in recent years, and its acquisition of some key football rights was seen as quite a coup.
The problem is, while earnings rose for the first few years as a result, the year to March 2016 saw only a 1% EPS rise, followed by a 9% drop last year. And forecasts suggest flat overall EPS figures between now and 2020.
Did BT overpay for those sports rights and overstretch itself ? It’s very possible it did, and the company is shouldering a hefty debt pile at the moment — net debt stood at £9.5bn at the first-half stage at 30 September.
While that’s a slight reduction, it’s above annualised EBIDTA of £6.4bn (based on first-half figures) by a multiple of 1.5 times. For many companies, that wouldn’t be any problem at all, but BT is also facing a massive pension fund deficit of £14bn — and that’s growing rather than shrinking.
Second worst
In fact, as recently as November 2017, index provider MSCI rated BT’s as the second-worst funded pension scheme in the world, and gave it a crisis rating. And on Thursday we learned that the pension fund’s chief executive is to quit.
At around 260p the shares are on a forward P/E multiple of only 9.5, which might look attractive. But it’s misleading. BT’s current market cap stands at £26bn, but a total of £21bn is effectively owed to lenders and to the pension fund.
Something is surely going to have to change on the cashflow front, and I can’t help seeing a lot of pressure on BT’s over-generous dividend payments. Forecast yields of over 6% just don’t look sustainable.
Sector leader
It’s hard to see Sky (LSE: SKY) as being anything but a leader of the televisual content delivery business, and it’s been in the news for a few reasons this week.
The biggest is the block by the Competition and Markets Authority of 21st Century Fox‘s takeover attempt. The strengthened influence of the Murdoch family would, the CMA says, cause too many media plurality concerns.
Things could change due to Disney’s acquisition plan for Fox, but for now Sky survives as a separate company, and I reckon it’s a good one for investors.
The other big news was Sky’s impressive first-half figures, which include a 5% rise in like-for-like revenue to £6.7bn, a 10% boost in EBITDA to £1.1bn, an 11% increase in EPS and a 4% hike to the interim dividend.
There’s debt
Sky does carry some debt, to the tune of £7.4bn at 31 December. That’s less than BT’s £9.5bn, though it’s a greater proportion of the firm’s market cap, which stands at approximately £18bn. And it’s more than three times estimated annualised EBITDA, which is a cause for concern for me.
But Sky’s big financial advantage over BT is the absence of a large pension deficit. And with earnings predicted to continue growing strongly, the current level of debt looks supportable — although I would like to see some reduction in the medium term.
One final bit of news is that Sky is set to ditch its focus on its trademark satellite dishes and offer content online in a bigger way, and that’s something that should cut costs.
On a forward P/E of around 14, I see Sky’s 1,023p shares as attractively valued. And it could even be a tasty takeover target for someone.
