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Earlier today Sky and Vodafone New Zealand confirmed they plan to merge.

It’s a big deal…

The deal is worth about $3.5 billion. That’s huge by New Zealand standards.

Last month I interviewed Simpson Grierson partner Michael Pollard for the Capital Markets report in the New Zealand Herald. I wrote:

“Deals nudged the $9 billion mark in New Zealand in 2015, and mergers and acquisitions around the world, with global volumes up 37 per cent, had a flow-through effect into the New Zealand market.”

At the time observers thought 2016 would be a solid year for New Zealand mergers and acquisitions after an outstanding 2015. Although they all told me the action doesn’t tend to warm up until mid-year.

Thanks to the Sky-Vodafone deal 2016 will be even bigger than 2015 for mergers and acquisitions.

…but not as big as you might think

Together the new business has a forecast revenue of a shade under $3 billion for the next financial year and expects to see an EBITDA (earnings before interest, tax, depreciation and amortisation) of almost $800 million.

It will be one of the largest businesses on the NZX. Yet, it still won’t be as big as Spark NZ.

Spark’s latest half-year report showed the company had revenues of around $1.7 billion for first six months of the 2016 financial year. EBITDA for the same period was a shade over $450 million.

Telecommunications isn’t growing. Spark’s guidance says to expect growth between 0 and 3 percent in the second half of the year. Let’s take the lower figure.

That would give Spark revenues of around $3.5 billion and an annual EBITDA of a little over $900 million.

On that basis, Spark NZ would still be about 10 to 15 percent larger than the merged Vodafone-Sky business.

Triple play

Somewhere in the thinking behind the Sky-Vodafone merger is the knowledge some US companies combine media and telecommunications. They may even be profitable.

In most case these are cable TV companies who also offer phone services. Or phone companies who deliver cable TV through their pipes.

You may hear this described as a triple play. That is a service provider selling TV, phone calling and internet connections with only one bill.

On the surface this is where a merged Sky-Vodafone business is going.

Yet there is one important difference between the US style triple play strategy and what happens in New Zealand.

America’s triple play operations are vertically integrated. The service provider owns the cable connection to a house. It controls everything all the way back to the telephone switch, internet server and TV broadcast suite.

That can’t happen in most of New Zealand. It may work in those parts of Wellington and Christchurch where Vodafone inherited the HFC network.

It is possible for the new business to run something along these lines using fixed wireless broadband — although data capacity could be an issue here. [1]

For the most part, the Sky-Vodafone business will need, at some point, to use the Chorus copper network or the various local fibre companies, including Chorus. These are open access, which means no vertical integration.

How this will play out and whether the new business hits regulatory hurdles is not yet clear. One thing is clear, if Sky-Vodafone’s competitors can appeal to the Commerce Commission, they will. Expect to see courtroom dramas as this plays out.

Content strategy

In Australia, Optus, a telecommunications company has the rights to English Premier League. If you want to watch English football in that country, you need to be an Optus customer.

Football is popular, but it is a minority sporting code. Australia’s big codes are subject to anti-siphoning laws. This means pay-to-view media companies can’t wall off the most popular sports fixtures from broadcast television.

There’s no anti-siphoning law in New Zealand. If you want to watch Rugby Union, Rugby League or Cricket, you have to buy a package from Sky. While there’s no indication the merged business intends to stop selling these packages to customers on other broadband networks, any hint this could happen would be, let’s say, controversial.

Dumb dumb pipes

Paul Brislen touches on this last point in an opinion piece at The Spinoff. He says this deal might be great for shareholders, but isn’t so good for consumers.

Moreover, Brislen explains why telecommunications companies are worried about being little more than a dumb pipe. The short version is that it is hard to make money when your rivals sell an identical product.

By merging with Sky, Vodafone skirts around the dumb pipe problem. It means it can add value to the dumb pipe by making it the conduit for content. The problem here is that Sky’s content selling model is every bit as much of a problem as the question of dumb pipes.

Putting two companies faced with tough technology challenges in one basket could solve all their problems. Or it could mean executives have to face a war on two fronts instead of one.

  1. Let’s face it. Data capacity is an issue here. Vodafone’s 4G network can only support a limited number of fixed wireless broadband users. While there’s scope for bigger data caps, it’s never going to be the best delivery mechanism for voracious TV consumers.  ↩

12 thoughts on “Sky-Vodafone $3.5 billion merger planned

  1. “The short version is that it is hard to make money when your rivals sell an identical product.”

    Odd that so many manage this outside of the telecommunications market. String, toothpaste, toilet paper, competition and people make at living at it. Are the telcos unable to cope?

    “The problem here is that Sky’s content selling model is every bit as much of a problem as the question of dumb pipes.”

    Precisely, it’s as if KiwiRail bought Solid Energy for the coal to fill their carriages.

    That wouldn’t have any happier an ending than this latest “moar acquisitions” strategy for growth by Vodafone.

  2. The point of Vodafone TV is to have Sky on a highly reliable cable service, alongside internet, phone and mobile, as well as getting a discount.
    Technically the delivery of Sky TV via an unlimited intranet cable connection dedicated solely to TV ensures that the network has extremely reliable uptime, and simple fixes when faults occur.
    We don’t get rainfade, and only have minor problems with TV lag during extreme cold winds at most twice in wellington’s winter.
    I have only suffered a major fault once in the last 2 years due to chorus bungling the neighbourhood rollout of the second fibre network in miramar, and that is simply due to their technicians not finishing the loops at the streetpole. (Which left my cable to get knocked out during the storms last month in high winds.)

    As the selling point of the Vodafone network in Wellington is the fact that you can get reception for TV even in the blackspots where freeview doesn’t work (and even get freeview on cable or fibre for free).
    It also makes more sense to go with Vodafone cable in Wellington than waiting for chorus to expand it’s gigabit internet service beyond the city of Dunedin when it feels like it, as at least Vodafone will get gigabit internet sooner than chorus might get around to it.

    • Yes. I make that point in the story. The deal matters where Vodafone has its own cable network. Mind you, since Vodafone acquired the network from TelstraClear there has been a lot of complaining about service quality. Is that all fixed now?

  3. patrick Pilcher: Nice write up – I think being a telco is a great way to become a millionaire – provided you are a billionaire to start with 🙂 What is interesting is Vodafones global strategy (triple plays are becomming a really big thing for them) and procurement muscle… sky will suddenly gain some serious content purchasing power which would have been all but impossible beforehand.. I guess the theory is that voda will offer more services and hope that this helps them reduce churn… Its going to be interesting to watch… via plus.google.com

  4. Bill Bennett: There are some odd things about this. Overseas ‘Triple play’ strategies are based on vertical integration, where the telco owns the network. In New Zealand the last part of the national fixed line network is either controlled by Chorus or one of the local fibre companies. Vodafone is vertically integrated where it has the old TelstraClear cable network or on its cellular network. via plus.google.com


  • Bill Bennett

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