Amstrad / BSkyB deal
I must admit to being a little blindsided by the BSkyB purchase of Amstrad. I think the deal makes sense financially, although is probably a lot less of a quantum jump strategically than most people think.
The 150p/share offer values the equity of Amstrad at £125m. The latest published balance sheet information highlighted cash balances of £28.3m as at the interims as at 31st Dec 2006. This would give an Enterprise Value of around £100m. We also have to consider adjustments for other working capital items such as inventories, trade and tax receivables and payables and provisions. Overall, the Amstrad balance sheet looks pretty strong and the EV is probably closer to £90m than £100m at 30th June.
Amstrad itself consists of 3 main parts: the Set Top Box business whose customers are BSkyB and Sky Italia; a marginally profitable (and therefore can be ignored) audio business; and the E-mailer phone business which has ceased manufacturer but provides on-going and declining profits.
In the six-months to June 2006, the email business contributed just over 30% of pre-tax profits with £3.3m out of £10.5m. This will obviously given the business model be highly cash generative but also be declining rapidly. I modelled this business declining steadily over 3-5 years and having cash conversion of between 50% and 80% and I get an upper value of around £9.5m and lower value of £2m. In around words it is insignificant compared to the overall set-top box business.
The next key variable on the deal is the relationship with Sky Italia: turnover in the 12months to June 2006 and 2005 was £18.3m and £24.5m respectively. This is a key relationship and really important to keep production volumes up and help in the economies of scale. Obviously BSkyB and Sky Italia have different shareholders and therefore probably a new mutually beneficial contract will have to b negotiated between the two.
If we use the same analysis of revenues by geographical destination and subtract the emailer revenues we get steady revenue in the UK of around £56m in 2005 and 2006 with BSkyB. Remember Amstrad only supplies currently around 30% of BSkyB Set-Top Boxes. Also, remember the higher end (and therefore more expensive) HD/PVR boxes are supplied by Thomson.
This probably means that with Amstrad Operating Margins of around 20% of Set-top boxes, BSkyB will save around £10m annum on current volumes. Obviously with an inhouse capability, BSkyB might push more volumes into the old Amstrad operations, but I seriously doubt that they would want to go the whole way and single source Set-Top boxes from an inhouse operation. Perhaps, BSkyB could go to 50% which would mean saving of around £15m/annum.
It is very easy looking at the Set-top box equation for BSkyB and adding in economies of scale with Sky Italia to produce a pretty compelling argument for the acquisition merely on a cost reduction basis.
Strategically, I am a little confused as to why BSkyB feels it necessary to add an ODM string to its bow. Currently, BSkyB effectively tightly controls the functionality of all its set top boxes through the issue of reference designs. I’m also sure that Sky keeps tight control of the software loads on the boxes through its key partnerships with OpenTV (Middleware and Interactive TV), NDS (Conditional Access and PVR functionality) and Gemstar (EPG patents). Most of the key (and complex) software drivers will be written not by Amstrad but by its Chipset partners of which the most important is Conexant who seem to provide the crucial video stream processor for the current generation of Amstrad boxes. I’m sure that BSkyB also provides most of the testing of the hardware and certainly periodically updates the software stacks through automatic flash updates.
There is also the risk with the next generation of set-top boxes which will almost certainly include some sort of home networking functionality: connecting all the home PCs and TVs and providing external connectivity whether via cable, adsl, dtt or satellite. This is exactly the market that some of computing giants such as Microsoft and Apple are targeting as well as usual plethora of home entertainment brands (Sony, Samsung and Panasonic) as well as the usual set-top box manufacturers (Thomson, Pace, Scientific Atlanta) I’m not convinced that BskyB can play and win against this crowd in the long run.
Overall, I’m not convinced at all with the acquisition and while it is certainly fickle to suggest so, I suspect the whole deal might be some sort of retirement present for Alan Sugar for all his years of help in building BSkyB into the juggernaut it is today.
The 150p/share offer values the equity of Amstrad at £125m. The latest published balance sheet information highlighted cash balances of £28.3m as at the interims as at 31st Dec 2006. This would give an Enterprise Value of around £100m. We also have to consider adjustments for other working capital items such as inventories, trade and tax receivables and payables and provisions. Overall, the Amstrad balance sheet looks pretty strong and the EV is probably closer to £90m than £100m at 30th June.
Amstrad itself consists of 3 main parts: the Set Top Box business whose customers are BSkyB and Sky Italia; a marginally profitable (and therefore can be ignored) audio business; and the E-mailer phone business which has ceased manufacturer but provides on-going and declining profits.
In the six-months to June 2006, the email business contributed just over 30% of pre-tax profits with £3.3m out of £10.5m. This will obviously given the business model be highly cash generative but also be declining rapidly. I modelled this business declining steadily over 3-5 years and having cash conversion of between 50% and 80% and I get an upper value of around £9.5m and lower value of £2m. In around words it is insignificant compared to the overall set-top box business.
The next key variable on the deal is the relationship with Sky Italia: turnover in the 12months to June 2006 and 2005 was £18.3m and £24.5m respectively. This is a key relationship and really important to keep production volumes up and help in the economies of scale. Obviously BSkyB and Sky Italia have different shareholders and therefore probably a new mutually beneficial contract will have to b negotiated between the two.
If we use the same analysis of revenues by geographical destination and subtract the emailer revenues we get steady revenue in the UK of around £56m in 2005 and 2006 with BSkyB. Remember Amstrad only supplies currently around 30% of BSkyB Set-Top Boxes. Also, remember the higher end (and therefore more expensive) HD/PVR boxes are supplied by Thomson.
This probably means that with Amstrad Operating Margins of around 20% of Set-top boxes, BSkyB will save around £10m annum on current volumes. Obviously with an inhouse capability, BSkyB might push more volumes into the old Amstrad operations, but I seriously doubt that they would want to go the whole way and single source Set-Top boxes from an inhouse operation. Perhaps, BSkyB could go to 50% which would mean saving of around £15m/annum.
It is very easy looking at the Set-top box equation for BSkyB and adding in economies of scale with Sky Italia to produce a pretty compelling argument for the acquisition merely on a cost reduction basis.
Strategically, I am a little confused as to why BSkyB feels it necessary to add an ODM string to its bow. Currently, BSkyB effectively tightly controls the functionality of all its set top boxes through the issue of reference designs. I’m also sure that Sky keeps tight control of the software loads on the boxes through its key partnerships with OpenTV (Middleware and Interactive TV), NDS (Conditional Access and PVR functionality) and Gemstar (EPG patents). Most of the key (and complex) software drivers will be written not by Amstrad but by its Chipset partners of which the most important is Conexant who seem to provide the crucial video stream processor for the current generation of Amstrad boxes. I’m sure that BSkyB also provides most of the testing of the hardware and certainly periodically updates the software stacks through automatic flash updates.
There is also the risk with the next generation of set-top boxes which will almost certainly include some sort of home networking functionality: connecting all the home PCs and TVs and providing external connectivity whether via cable, adsl, dtt or satellite. This is exactly the market that some of computing giants such as Microsoft and Apple are targeting as well as usual plethora of home entertainment brands (Sony, Samsung and Panasonic) as well as the usual set-top box manufacturers (Thomson, Pace, Scientific Atlanta) I’m not convinced that BskyB can play and win against this crowd in the long run.
Overall, I’m not convinced at all with the acquisition and while it is certainly fickle to suggest so, I suspect the whole deal might be some sort of retirement present for Alan Sugar for all his years of help in building BSkyB into the juggernaut it is today.
<< Home