Sky TV seeks to buy MediaWorks: Experts on Commerce Commission prospects, analysts on its commercial sense

Sky's potential takeover of MediaWorks would require shareholder and Commerce Commission approval. Photo / File

Experts say a Sky TV buyout of MediaWorks should have relatively smooth sailing past the Commerce Commission - but analysts are scratching their heads over the deal's commercial logic.

And investors reacted badly as Sky confirmed it is in talks to buy MediaWorks - which operates in the radio and billboard markets following the sale of its TV business to Discovery in 2020.

Sky shares were down 7.58 per cent to $2.44 in mid-afternoon trading.

"Investors are apprehensive," Craigs Investment Partners research head Mark Lister tells the Herald.

"They know Sky has a strong balance sheet and cash in the bank, but they seem to be saying: 'Is this the best use of that capital?'"

He continues, "At this stage, there's so much we don't know, including how Sky could use MediaWorks assets and, most importantly, the purchase price. If the price turns out to be highly attractive, investor sentiment could change on a dime."

'Not an intuitive deal'

Forsyth Barr senior analyst Aaron Ibbotson also wants more detail, but says from what he's seen so far, the synergies are not obvious.

"It's not an intuitive deal," he says.

A MediaWorks takeover would diversify Sky's revenue, he adds, "But it seems too soon. It seems very early on their transformation journey to make such a large acquisition."

If the price turns out to be "very attractive", that would help shift his thinking, Ibbotson says.

Morningstar's Brian Han says it's "puzzling" and that it's highly debatable if highly cyclical outdoor advertising would boost Sky's growth. It was possible the talks with MediaWorks were a negotiating tactic (There have been unconfirmed reports that Sky has courted bids from two private equity players. Sky earlier said it had been the subject of unsolicited approaches.)

But the Spinoff's Duncan Greive says it would bulk up Sky's advertising business and give the group much more diversification.

Would the ComCom allow it?

Any deal will require shareholder approval (which could involve some persuasion, given shares sunk on the news), plus the green light from the Commerce Commission - which will have to assess if it would lessen competition.

The regulator shot down a previous deal involving Sky - its proposed merger with Vodafone NZ, which the pair abandoned in 2017.

The ComCom also blocked a proposed merger between NZ Herald publisher NZME and Stuff in the same year, arguing it would concentrate too much media influence in one business, with the High Court and Court of Appeal backing its decision in 2018.

But this time around, experts say it's odds-on the deal will get the go-ahead.

"The television market has changed a lot since the Commerce Commission rejected the Vodafone-Sky acquisition," says Auckland University Associate Professor Chris Noonan, who lectures in competition and company law.

"Some of the key considerations that influenced the Commission's decision and stood in the way of that acquisition no longer apply."

MediaWorks' earlier sale of its TV business should further smooth the regulatory path if a Sky buyout is ultimately proposed, a leading competition lawyer tells the Herald.

"Taking a traditional approach there is no horizontal or vertical overlap so you would not expect issues unless they were vertical and conglomerate issues," says the lawyer, who has been involved with several major merges, and requested anonymity.

"The commission obviously was concerned about that with Sky-Vodafone," he says.

In 2017, the regulator said that Sky's (then) dominance in premium sports rights could be leveraged to give it an edge in the mobile market.

But there is greater contestability in the markets where MediaWorks operates today - billboards, where it faces competition from Ooh Media (the Australian company that bought Adshel), and radio, where the market is divided between stations in the MediaWorks and NZME sables

"So while you would expect scrutiny, this deal would not seem to give the merged entity the ability to increase prices or reduce quality or be a bottleneck that somehow prevented competitors from competing, or having a portfolio of products that others couldn't match given the range bundling options available," the lawyer says.

"So at first blush, I wouldn't expect this to be problematic."

How things stand today

MediaWorks' stable of radio stations includes The Edge, The Rock and More FM. It holds roughly half the market, with stations owned by Herald publisher NZME holding most of the balance.

MediaWorks CEO Cam Wallace said "no comment at this stage" when approached by the Herald this morning.

MediaWorks is currently owned 59.1 per cent by US private equity firm Oaktree Capital and 39.4 per cent by Sydney-based Quadrant Private Equity (which in 2019 bought QMS, whose NZ operation included a 40 per cent stake in MediaWorks after QMS and MediaWorks merged their outdoor advertising operations). The balance of shares (1.5 per cent) are held by Wallace.

As the Herald reported on Friday, Wallace has inked a potentially lucrative deal tied to his ability to find new owners for the radio and outdoor advertising business.

MediaWorks chief executive Cam Wallace has inked a multimillion-dollar deal reliant on finding new owners for the radio and billboard company. Photo / Supplied

Accounts filed with the Companies Office show Wallace entered into a long-term incentive scheme in October 2021 entitling him to a share of any sale proceeds and the ability to buy shares of the company at a discounted rate.

The accounts record the value of these options - entitling Wallace to 1.5 per cent of any sale price excess above $175 million and the ability to buy 1.5 per cent of shares in the company for $300,000 - as presently being worth $2.2m.

The accounts to December 2021 show narrowed losses from $4.8m to $2.9m over the period, with advertising revenue up to $195m from $165m the year prior (Sky, by contrast says it's on track for revenue of around $743m this year). Deteriorating conditions in the outdoor advertising market, largely blamed on Covid, saw the company book a $12m impairment on that side of its business. Borrowings stood at $103m.

With the deal talks now underway, Quadrant is said to have engaged UBS to find a buyer for MediaWorks, while Sky is reportedly being advised by Jarden.

At its half-year report, Sky said it had $74m in cash, which has since been bolstered by $56m from the sale of its Mt Wellington campus.

Ahead of today's news, Sky shares were up 54 per cent for the year on its return to customer gains, and its intention to reinstate its dividend.