The Times says DAZN, created by a merger of smaller firms in 2015, has lost more than US$5b over the years, but is now close to break-even. Blavatnik, 67, made his fortune from aluminium and oil after the collapse of the Soviet Union. These days, he holds both UK and US citizenship. Forbes estimates his worth at US$32b, making him the 52nd-richest person in the world. He’s so far bankrolled DAZN from his personal fortune.

DAZN’s sports-focused portfolio includes streaming rights to the NFL outside the US, and rights to European soccer in many countries – including New Zealand, where last year it took Uefa Champions League rights off Sky. Boxing has also been a big point of focus for DAZN, which first appeared on most Kiwis’ radar when it streamed a Joseph Parker pay-per-view fight in 2020.

Sky seen as a takeover target

Foxtel will be DAZN’s sixth acquisition, assuming it gets the green light to buy it off its current owners (NewsCorp and Telstra).

In a December 19 research note, Forsyth Barr upgraded Sky to “outperform” and bumped up its 12-month target price from $3.00 to $3.20 (shares were recently trading at $2.85).

Over the past couple of years, Sky has righted its ship. Costs have been slashed. Gains in streaming have seen it stabilise customer numbers, and return to paying a dividend (and chief executive Sophie Moloney recently said it’s still on track to increase the payout from 19 cents per share (cps) last year to 30cps by FY2026, even if profit has been under near-term pressure amid the current economic slowdown).

But so far, investors have given it scant credit for its turnaround. Shares are up a modest 6% over the past 12 months. Its market cap of $388 million is 25% less than it was five years ago.

So where to from here?

Forsyth Barr analysts Aaron Ibbotson and Benjamin Crozier said, “Near-term, we see two potentials to unlock value: the renewal of rugby rights at a lower price, and the potential for a takeover bid.”

Cheaper rugby rights seem in the bag. On December 8, the Herald’s Gregor Paul reported New Zealand Rugby (NZR) is expected to earn $25m less per year under a renewed deal with Sky. Spark Sport has exited stage left (joining BT and other telcos around the world who lost their content appetite). And in the more profit-focused post-pandemic environment, the global streamers have – with some exceptions, like Apple with US “soccer” – have waned in their enthusiasm for sports deals at any cost.

A key case in point is Amazon, one of three rights holders in the current rights cycle for the world’s richest sporting competition, the English Premier League. The tech giant dipped out of bidding for the next three-season cycle. From August, EPL rights will be held by three traditional players: Sky UK, the BBC and Warner Bros Discovery-owned TNT (which bought BT’s sports business). Netflix (2024 revenue: US$38b) has recently dabbled in celebrity boxing, but New Zealand rugby is way too small a brand to meaningfully move its earnings needle.

Sky’s potential for a takeover is more than notional. In late 2023, firm received an indicative, non-binding offer from an unnamed party, at an undisclosed level. It was rejected based on valuation, but serious enough for the broadcaster to disclose to the market.

What would DAZN, or another buyer, pay for Sky?

The deal DAZN-Foxtel deal won’t be wrapped up for several months. Morningstar’s Brian Han wrote on December 11, “The bottom line is that if the Foxtel sale eventuates, it is likely to support our view that Sky shares are undervalued.”

Han said a Foxtel sale at three times or more the forecast Ebitda would vindicate his valuation of Sky (A$2.60/$2.90 – or a market cap of just under $400m), which was trading at a 2.2x multiple. In the event, Foxtel sold for what the Australian called a “blockbuster” 7x Ebitda.

“At the end of June 2024, 69% of Foxtel’s paid subscribers streamed, compared with 46% for Sky,” Han wrote in December.

He saw valuation pros and cons balancing out between the two firms.

“Sports streaming accounted for 33% of Foxtel’s subscribers, compared with 18% for Sky. Greater progress in streaming transition and higher penetration into sports streaming may be grounds for attributing higher valuation multiples to Foxtel.

“However, the annualised churn amount [for] Sky’s legacy set-top box customers of 11.5% is lower than Foxtel’s 12.4%. Sky’s Ebitda margins stand at 19.9% compared with Foxtel’s at 16.2%, reflecting the greater burden of Foxtel’s expensive sports rights.”

But there are also some wrinkles in the proposed deal.

The AFR noted after A$1.26b in non-recourse debt and A$706m in shareholder loans – A$578m to 65% owner News Corp and A$128m to 35% shareholder Telstra – Foxtel’s join owners would receive around A$1.4b.

And it won’t be in cash.

Rather, News Corp will get a 6% stake in DAZN if the deal is closed and Telstra 3%, implying DAZN, which hasn’t published accounts since 2022, is worth around US$10b.

In late December, the AFR said it could take years to gauge if that valuation was valid. But if the Saudis do take a 10% stake for US$1b, it will shortly be proven with short shrift.

Sky has around one million paying customers to Foxtel’s 4.7 million.

Sky customer mix

As of June 30, 2024. Source / FY2024 full-year results filing.

Foxtel customer mix

Foxtel Residential (equivalent to Sky Box): 1.21 million

Kayo Sports (equivalent to Sky Sport Now app): 1.60 million

Binge (equivalent to Neon): 1.55 million

As of June 30, 2024. Source / FY2024 full-year results filing.

DAZN did not immediately respond to a request for comment. Sky has a long-standing policy of not commenting on deal speculation. Sky said “constructive” talks with NZR continue ahead of the expiration of the current rugby deal in December.

Chris Keall is an Auckland-based member of the Herald’s business team. He joined the Herald in 2018 and is the technology editor and a senior business writer.