TELCOs – CIMB
2010 World Cup joint bid
Joint bid for 2010 World Cup rights
Maintain Underweight on the sector. SingTel and StarHub have announced a joint bid for the 2010 football World Cup broadcast rights to provide higher value to FIFA while ensuring affordable costs to consumers. We are positive on the move as it should prevent an all-out content warfare from hitting telcos’ margins. That said, the devil is in the details and it remains uncertain whether FIFA will accept the bid. This piece of news does not change our UNDERWEIGHT position on the sector as we are concerned about myriad sector risks. M1 (target S$2.07) remains our top pick with a NEUTRAL rating for its capital-management potential and greatest upside from NGNBN. StarHub also remains a NEUTRAL (target S$2.15) for its attractive dividend yields of 10-11%. SingTel is an UNDERPERFORM (target S$3.30) on our concerns over escalating content costs in Singapore and competition in India and Australia.
StarHub and SingTel announced that they have put in a joint bid for the 2010 football World Cup broadcast rights. While attempting to provide a much higher value to FIFA, the telcos said their bid also tries to ensure programme affordability for consumers. While no details have been revealed, the announcement included the statement that the price offered to FIFA “would sacrifice all World Cup margins for both SingTel and StarHub while keeping the price affordable for consumers”. The two companies have yet to reach an agreement with FIFA but will continue to negotiate to reach one.
We are positive on the joint bid. The joint bid should be positive for both SingTel and StarHub as it would prevent an all-out bidding warfare for this piece of content. While the costs of rights have escalated, the damage to margins would be less severe as the costs would be shared by two non-competing parties. Our interpretation of the press release is that the content would not be loss-making but would probably be neutral for earnings.
For StarHub, this joint bid would stem concerns about more loss of content although StarHub would not have exclusivity to the World Cup. For SingTel, it would represent another feather in its sports-programming cap.
Devil is in the details. That said, we believe practical obstacles may lie in the way, recalling the 2010-2012 Barclays Premier League (BPL) rights when a joint bid was scuppered at a very late stage. We see two key hurdles, namely from: 1) FIFA’s willingness to accept such a proposal; and 2) finding a way to split the matches between the two entities if they are not able to simulcast them at the same time.
Could it signal future content sharing? The collaboration between StarHub and SingTel raises the question of whether more expensive content may be shared in the future. Moreover, other compelling content is negotiated directly with content owners and not on an auction basis like the BPL rights and World Cup rights. Finally, StarHub may be rather loathe to lose exclusivity for its other prime content which would expire from end-2011 onwards as a lack of exclusivity would devalue its hubbing proposition and strip StarHub of differentiation with its larger rival.
Valuation and recommendation
Maintain UNDERWEIGHT on the sector. While the joint bid is deemed positive for StarHub and SingTel, this piece of news does not change our negative position on the sector, which is grappling with rising content costs, pressure on broadband ARPUs and escalating device subsidies. We continue to advocate M1 as our top pick with an unchanged NEUTRAL rating and DCF-based target price of S$2.07 (WACC 9.5%) for its capital-management potential and greatest upside from NGNBN.