Foxtel IPO and Telstra

Foxtel IPO and Telstra

Foxtel was formed in 1995 as a joint venture between News Corp (NWS) and Telstra (TLS). Last year, rumours swirled saying that Foxtel would pursue an IPO but in the end, nothing eventuated. With February reporting season fast approaching, those in the know are saying that a good result for Foxtel (reported as a part of News Corp’s results) could put the IPO back on the table for 2017. Foxtel has been forced to adapt itself to the fast-changing home entertainment market. Online streaming is rapidly becoming the medium of choice for households wanting on-demand access to movies and TV shows. The relatively low cost of these services compared to Foxtel has put significant pressure on Foxtel’s business model.

In response, Foxtel has shifted more toward the area in which it has an advantage - sport. Live sports is a very valuable business in Australia with Rugby Union, Rugby League and AFL (to name a few) widely watched across Australia. Since its inception, Foxtel’s highest ratings have come from sporting events, such as the London Olympics and the 2011 Rugby World Cup. It is difficult for online streaming companies to compete in the area of live sport as the codes themselves normally award long-term television rights to just one provider (although there is a risk of this changing in the long-term as we have seen in other sports abroad). Foxtel is therefore somewhat protected from competition in this area. As part of last year’s IPO discussions, TLS suggested that Foxtel merge with the NWS-owned Fox Sports to consolidate Foxtel as the premiere live sport provider. As part of this process TLS would partly sell down its stake in Foxtel with the sold portion being floated to the public. This would equate to approximately 30% of the company and would be expected to fetch between $1.5-$2bn. The funds raised from the float could be used to further invest in technologies that would help TLS diversify from its legacy broadband and mobiles business.

In competing in the new environment, Foxtel currently has an online offering called Foxtel Play but at this stage it is considerably more expensive than other steaming services such as Netflix or Stan (and also not as platform agnostic as its peers which is a strategy of Foxtel’s to ‘lock in’ its clients). In 2014, Foxtel launched its own version of a competitor to Stan and Netflix with Presto (jointly owned by Seven West Media [SWM]). Presto was priced competitively with other online streaming services but was shuttered this month (January 2017) with subscribers being transported across to Foxtel Play. It is difficult to see Foxtel play gaining significant traction considering the higher prices clients are charged. Subscribers are forced to choose which ‘packs’ they want to have (such as Drama, Docos, Sport etc.) with each pack costing between $10 and $25 per month. After adding a few such packs the monthly cost can easily balloon above $50 per month. Considering Netflix, for example, currently charges between $9 and $15 per month, one would expect Foxtel Play to have a significantly better offering than the others but this doesn’t seem to be the case.

If the float goes ahead it will be interesting to gauge investor interest considering that Foxtel will likely be facing an uphill battle to retain subscribers considering the increased competition in the sector. Interestingly Foxtel recently increased its prices on certain ‘packs’ within its offering and with the rumour of a float resurfacing it’s easy to assume that the point of this was to bulk up the company’s short-term revenues at profits (although very possibly at the cost of long-term market share). Both TLS and NWS are facing significant challenges in their respective sectors and a float of Foxtel may allow them (and TLS in particular) to relinquish some responsibility for this business. With a huge number of the Australian public holding TLS there is a good chance of seeing a priority offer being made to TLS shareholders although given the way the business is being run in the short-term as well as the changing dynamics of the industry this is a business that does not appeal at anything other than a bargain basement price. At this stage, a public Foxtel wouldn’t fit in any of Rivkin’s investment strategies.
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