LONDON (Dow Jones)--British Sky Broadcasting Group PLC's (BSY.LN) 15-year grip on televised British soccer is being challenged as the first round of the rights auction closes this week. But most analysts expect the company to retain its dominance over the broadcasts.
Soccer has been the backbone of BSkyB's commercial strategy since it won exclusive rights to broadcast Premier League soccer in 1991, though rival broadcasters, including NTL Inc. (NTLI), are eying the rights.
Analysts say a successful grab for soccer by a rival broadcaster could severely damage BSkyB.
In a worst case scenario, if BSkyB retains just one or fails to score any soccer rights packages, the company could slice 47% from the company's 2008 earnings before interest, tax and amortization (EBITA), analysts at ABN Amro said in a recent research note.
But , the analysts add, the rights are so critical that BSkyB, which is dominated by Rupert-Murdoch's News Corp. (NWS), will fight for them.
"Given the importance of these rights to BSkyB we believe there is only a slim chance of this happening," ABN Amro analysts say.
The Premier League, which represents the U.K.'s top 20 clubs, is selling rights for 2007-2010. First round bids in the sealed auction must be in by Thursday, the Premier League confirmed, though a spokesman said that the auction could go to a second or third round if there is sufficient competition.
In a deal struck late last year between E.U. competition commissioner Neelie Kroes and the Premier League, no single bidder will be able to buy all six soccer rights packages on offer, though one company could buy five.
In an early April research note, UBS said it expects BSkyB to aim to acquire the maximum five packages.
Prompted by changes in the regulatory and competitive landscape, a number of companies are exploring challenging BSkyB for the right to show soccer, which is hugely popular with U.K. consumers.
NTL is the candidate most likely to pose a threat according to analysts. The company recently bought rival Telewest Global and mobile operator Virgin Mobile Holdings U.K. PLC (VMOB.LN). With U.K. entrepreneur Richard Branson to join its board shortly, Virgin asserts that televised soccer is the best way to attract subscribers to its soon-to-launch Virgin cable offering, people familiar with the company say.
NTL's chairman, Jim Mooney, said at the time of the merger:
"We are looking at football. I think the concept of Virgin Sports is one of the most exciting things we can look forward to."
UBS' NTL analyst, Aryeh Bourkoff, said in a research note that he expects the company to bid for three out of six packages. A person with knowledge of NTL's strategy says the company believes that it would need at least three packages to persuade consumers to abandon their Sky subscriptions, but NTL fears that BSkyB could be angered if NTL threatens direct competition, prompting price-rises in the resale value of match rights should NTL prove unsuccessful. A person with knowledge of NTL's strategy says the company will need at least three packages to attract consumers. But NTL fears that BSkyB could retaliate by hiking resale prices of match rights if NTL's bid fails, that person added.
Forcing BSkyB's all-important pubs and clubs customers to switch to cable could also be a long process, this person adds.
Strategic difficulties could also hamper any NTL attempt to sweep rights. NTL tried to persuade regulators to impose a 50% soccer rights ownership limit on broadcasters and has acknowedged that acquiring less than this would make it "difficult" to challenge BSkyB.
NTL also miscalculated when it paid GBP328 million for video on demand Premier League rights in 2000, only to back out of the deal eight months later, admitting it couldn't generate enough revenue, which is unlikely to count in its favor.
The U.K.'s largest terrestrial broadcasters, the British Broadcasting Corp. (BBC.YY) and ITV PLC (ITV.LN), are unlikely to win more than one package of rights, according to Alan Flitcroft, a Partner in Ernst & Young's technology, communications and entertainment practice. Flitcroft says that only subscriber-service broadcasters can afford to recoup the high cost of the packages.
Setanta, the Irish cable channel 40% owned by private equity company Benchmark Capital (BNH.XX), is considered a more likely contender than ITV or the BBC .
"We said we were interested and we remain interested," Richard Brooke, Setanta's Director of Corporate Development, told Dow Jones Newswires. Brooke declined to say how many packages Setanta may want.
But a person familiar with the company's strategy said "one package would be a bit light, it would only be worth it if we had at least two."
Setanta is likely to partner with another broadcaster to minimize the financial risk of bidding for the packages, people familiar with the company say.
The tender document for the rights divides the games up into six packages where each bidder is allowed to pick the 23 best games per season. Any bidder with four or more packages will retain enough Premier League soccer that the majority of the U.K.'s soccer fans, both consumers and the all important pubs and clubs market, will have to subscribe, analysts say.
"We believe that BSkyB - owing to its scale and the number of households, pubs and restaurants reached by Sky Sports - will continue to show Premiership matches whatever the outcome of the bidding war," according to Claudio Aspesi or Bernstein Research.
Aspesi notes: "In spite of losing rights exclusivity, we believe Sky's economic advantage essentially places 4-5 packages almost out of reach for other bidders, given Sky's distribution scale and breadth outside the U.K." Ernst & Young's Flitcroft supports this view, stressing BSkyB's long experience and strong brand as a U.K. sports broadcaster and its entrenched relationship with the Premier League.
But BSkyB, whose chief executive is Rupert Murdoch's son James Murdoch, will be aware that there is no room for complacency. Late last year, German soccer league DFL awarded soccer rights to Arena, owned by Unity Media, in conjunction with Germany's largest cable operator Kabel Deutschland.
Shares of the incumbent rights owner, pay TV operator Premiere A.G. (PRE.XE), plunged 45% a day after the news was confirmed.
Analysts expect BSkyB to pay a premium above the GBP1.02 billion it paid from 2003 to 2006 to avoid losing the soccer rights. UBS expects an increase of 2.5% to 3%, while Morgan Stanley has built a 5% into its models.