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European Domination Can Make British Sky Broadcasting Group plc A Buy

skyIt’s been a rather turbulent period for Sky (LSE: BSY), with the company’s dominance on sports rights coming under increased pressure from BT (LSE: BT-A) (NYSE: BT.US), which has already outbid Sky on European Champions League football and is mounting a serious assault on Sky’s grip on Premier League football, too.

However, today’s news that Sky is to acquire Sky Deutschland and Sky Italia is great news for the company and could help it to reassert itself as a strong media play. Here’s why.

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A Pause For Breath

Of course, the recent difficulties that Sky has experienced surrounding sports rights has had a hugely beneficial effect on the company. Indeed, it has forced Sky to think beyond its current offering of sports rights and movies, with it developing a wider range of programming so as to differentiate itself more clearly from the competition. For instance, Sky has invested in its production facilities (the most recent example being the purchase of a stake in Love Productions) and has focused on offering customers an array of channels that are only available on Sky. Doing so could help the company to develop higher levels of customer loyalty and, ultimately deliver higher profit in the long run.

An Expansion

However, Sky isn’t backing away from a fight with BT, as shown by its acquisition of Sky Deutschland and Sky Italia. Indeed, the new, bigger Sky will be able to compete more easily with BT and anyone else when it comes to sports rights. Although the previously mentioned unique channels and production investment will aid Sky’s bottom line, sports rights are the ultimate differentiator and anything that helps Sky to maintain this is a good thing. Furthermore, Sky’s debt levels are low enough to make further acquisitions a possibility, which could be even better news for investors as it seeks to consolidate its position as a major European pay-TV operator.

Looking Ahead

Clearly, 2014 has been a tough year for Sky, and this is reflected in its results. Earnings per share (EPS) were flat for the last year (as reported in today’s results) but are expected to rise by 8% next year. This compares reasonably well to BT, which is due to report earnings growth of 4% this year and 8% next year. Moreover, the two companies continue to offer good value at current levels, with BT having a price to earnings (P/E) ratio of 13.2 and Sky’s being 15. As such, both companies could have strong futures, although Sky’s new dominance of Europe could make the difference when it comes to the all-important bidding war for sports rights.

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Peter Stephens has no position in any shares mentioned. The Motley Fool recommends British Sky Broadcasting.

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