Sky tackled by the referee

Investors should play a waiting game as the satellite broadcaster is investigated by the OFT
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The Independent Online
NETTING the TV rights to a large chunk of British league football gave BSkyB, the satellite broadcaster controlled by Rupert Murdoch, a rosy start to last week. BSkyB tied up the Endsleigh League - a hat-trick of divisions one, two and three - in a pounds 125m five-year deal, replicating its pounds 300m capture of the Premiership three years ago.

From next season, even more fans will have to shell out for a satellite dish or cable TV subscription or pop down to the local Sky Sports pub.

But BSkyB's ambition may yet be its undoing. In a twist worthy of any FA Cup Final, the Office of Fair Trading shocked the market on Friday by re-opening an inquiry into Mr Murdoch's near stranglehold on pay TV.

BSkyB's shares slumped 70p from a record high of 462p immediately after the announcement, following a relentless rise from around 270p since June. They rallied quickly, ending the day just 5.5p down at 428.5p, after the company dismissed complaints as nothing new.

The OFT's move, however, strengthened the argument of some market pundits that the honeymoon may be over. "The company's valuation has built up on a clear run that has ignored a high level of regulatory risk and possible future competition," one media analyst said.

BSkyB has been here before. In March, it signed a series of voluntary undertakings ending conditions that forced cable TV operators to take a "bundle" of Sky channels in order to qualify for price discounts.

Independent channels had long complained that the arrangements prevented access to cable because of BSkyB's programming muscle, notably in sport and films. However, the company, run by no-nonsense New Zealander, Sam Chisholm, has proved adept at staying just on the right side of the rules.

In May BSkyB signed 10-year programme deals with TeleWest and Nynex, the two biggest cable TV firms. Discounts and non-compete clauses attracted the wrath of the OFT, but the deals succeeded in scuppering a cable get- together aimed at outbidding BSkyB for events.

The company was formed in 1990 through the merger of Mr Murdoch's Sky with British Satellite Broadcasting. The objective was to stop the two fledgeling stations competing themselves into the ground.

Under Mr Chisholm, the upturn has been rapid. With live sport to the fore, the company has enjoyed a virtuous circle of rising subscriptions, strong advertising and lower cancellations. As one industry observer puts it: "The Premier League made BSkyB."

Investors have made vast profits on the company's pounds 4.4bn flotation at 256p last November, but the share price only started motoring four months ago after Pearson decided to cash in a pounds 550m stake, propelling BSkyB into the FT-SE 100.

Inclusion in Morgan Stanley's international index last week also led more index-tracker funds to buy in.

Pre-tax profits for 1994/5 leapt 67 per cent to pounds 155.3m as more than 4 million satellite and cable subscribers tuned in. Analysts are forecasting pounds 250m to pounds 350m next year and up to pounds 560m for 1997/8, the most explosive growth in the sector.

BSkyB puts the OFT's inquiry down to trouble-making by smaller cable firms: "We're happy to co-operate. The big cable companies have good relations with us and just want to grow the business," said deputy managing director David Chance.

But with digital TV on the way, the OFT, under new director-general John Bridgeman, looks like taking a closer look at BSkyB's deals, its monopoly of signal-scrambling technolgy and its huge, exclusive subscriber list. A full-blown Monopolies and Mergers Commission reference cannot be ruled out.

At the current price, boosted by indexation demand, the shares stand at 28 times the lowest 1997 earnings forecasts, a huge premium. Warnings about over-valuation may yet be right and the stock should be avoided until the outcome of the OFT inquiry is known.


Share price 428.5p

1994 1995 1996* 1997*

Turnover pounds 551m pounds 778m pounds 925m pounds 1.06bn Pre-tax profits pounds 92.9m pounds 155.3m pounds 255m pounds 345m Earnings per share 6.8p 9.2p 13.8p 17.9p Dividend per share - 2.5p 6.5p 9.0p Price-earnings ratio - 45.6 31.1 23.9 Gross yield - 0.7% 1.8% 2.4%

* Estimates