View From City Road: Holes in BSkyB's pounds 5bn dish

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The Independent Online
Say a thing often enough and people will come to believe it, as Rupert Murdoch, who has now added his voice to those who talk in terms of a BSkyB worth pounds 5bn, is doubtless aware.

So often has this sort of figure been applied to the soon-to-be-floated satellite channel of late that it is in danger of achieving the status of fact.

Well it is not. It is a guesstimate, and a pretty tendentious one at that.

BSkyB is clearly not a venture capital flotation like Eurotunnel, or Euro Disney, or the clutch of cable TV companies planning to come to market. It has revenues, a proven formula and a track record to sell.

Yet it will be marketed on future rather than existing performance. It will be sold on the basis of the kind of earnings it will make in four or five years' time rather than today or even tomorrow. And the myriad of assumptions and estimates on which those earnings will have to be based creates fertile ground for error.

To get a valuation of near pounds 5bn, BZW, joint broker to the float, assumes that revenues of pounds 550m and operating profits of pounds 170m will rise to pounds 1.2bn and pounds 513m respectively by mid- 1998.

Yet that involves assuming that the number of satellite dish owners subscribing to Sky will rise from 2.7 million to around 4.2 million and the number of cable subscribers from 800,000 to 3.2 million. While the number of homes taking cable will probably rise steeply in the next few years, many of those will throw away their satellite dish as they do so. Goldman Sachs, another broker to the BSkyB issue, pointed out in connection with the mooted float of TeleWest, the cable company, that 20 per cent of owner-occupied dish homes switch to cable, given the opportunity.

That figure is nearer 50 per cent if incentives are offered or 70 per cent if the property is rented. So will satellite subscriptions really continue to grow? And will advertising revenues really triple to pounds 244m, the other key assumption in the valuation?

The only truthful answer is that no one knows. Just as they don't know what programming muscle the cable companies will develop, and what sort of tougher distribution deal they might strike with BSkyB. BZW's estimate that programming costs will only double by 1998 could well be optimistic.

BZW's other assumptions also look inflated. The firm believes the shares will trade on a multiple of 15.3 times BSkyB's estimated 1998 post-tax earnings of pounds 292m - a 10 per cent premium to the sector. Apply the current sector multiple to BSkyB's current earnings and the valuation turns out to be barely pounds 2bn.

What does BSkyB amount to? It is a lease on a satellite, a warehouse on the outskirts of London, a couple of channels that nobody watches and the bought-in rights to an array of sporting events and Hollywood movies, most of which are produced by somebody else. BSKyB also owns the satellite broadcasting franchise for Britain - a form of distribution whose time, with the rise of cable, may already have largely come and gone. Not much to justify a pounds 5bn valuation.