The Viability of Investing in BSkyB Corporation - Essay Example

?A Report on the Viability of Investing in BSkyB Corporation Table of Contents A Report on the Viability of Investing in BSkyB Corporation 1.0 Executive summary 2 2.0 BSkyB Corporation 2 2.1 BSkyB Corporation’s mission and strategic direction 3 3.0 Balance of skills and experience of the board of directors 3 4.0 BSkyB’s SWOT analysis 4 5.0 Financial analysis 5 Informa plc 7 Industry Ratios 7 6.0 Future financial prospects 8 7.0 Recommendation 8 References 9 Horsman, M. (1997). Sky High: The Inside Story of BSKYB. U.K: Orion Business Books 10 Horsman, M. (1998). Sky High: The Amazing Story of BskyB - and the Egos, Deals and Ambitions that Revolutionized TV Broadcasting. U.K : Orion Business Books 10 Starks, M. (2007). Switching to digital television. U.K: Intellect Books 10 1.0 Executive summary This present paper is a report that has been prepared from the standpoint of financial analysts working for a Merchant Bank. In the report, the financial analysts provide advice to the pension fund managers in regards to whether it is a viable or a good strategic business decision to make a considerable investment in BSkyB Corporation. The size of the investment is still a matter of discussion but if the report recommends for the investment in BSkyB then the pension fund managers will seek to purchase up to a maximum of 3% of the total issued share capital of the corporation that are listed at the London Stock Exchange. The report will include historical data of the BSkyB Corporation and it will focus on the future prospects for the company. Other details that will be contained in the report include a brief description of the company, the company’s mission, and strategic direction, the balance of skills and experience of the Board of Directors, and the SWOT analysis of the company. 2.0 BSkyB Corporation According to Horsman (1997), The British Sky Broadcasting Group plc (BSkyB), which is commonly referred to as Sky is a British corporation that mainly deals in satellite broadcasting, broadband, and telephone services. The company was originally formed in the year 1990 after the merger between the British Satellite Broadcasting and Sky Television, which were at that time facing financial constraints because of the increased competition between them and other rival television companies (Horsman, 1998). Presently, the company, which has its headquarters located at London, operates in both the Republic of Ireland and the United Kingdom. By operating in these two markets, the company has been able to have 10,742,000 customers of which majority of them are TV customers. Other significant customers are the Sky HD customers, the Sky Talk customers, and the Sky broadband customers. It is of essence to note that besides the residential customer base, the company operates other businesses that target a different consumer segments, these businesses include Sky Business, Sky Media, Sky Betting & Gaming, and Sky Sports Digital Media. This wide customer base has propelled the company to be largest pay-TV broadcaster in both the Republic of Ireland and the United Kingdom (BSkyB Corporate, 2013). 2.1 BSkyB Corporation’s mission and strategic direction BSkyB mission is to offer the best to the customers, and other stakeholders, and even to positively contribute to the lives of people both in the Republic of Ireland and in the UK. Secondly, the company also aims at creating value for their shareholders whilst achieving lasting success by focusing on long-term sustainability. The company’s strategic direction is based on the idea of always seeking to improve on their offerings to their customers, and this involves coming up with new innovative products for satellite broadcasting, and improving the quality of broadband and telephone services. 3.0 Balance of skills and experience of the board of directors The BSkyB Corporation’s board of directors is made up of fourteen members of whom the Chairman is Mr. Nicholas Ferguson who is a non-executive director of the company. Mr. Ferguson brings into the board exceptional skills and experience that he has gained for more than three decades while he was serving in leadership positions in the financial sector. The second top most senior member of the company’s board is Mr. Andrew Higginson who is a senior independent non-executive director and the chairperson of the corporate governance and nominations committee. Mr. Higginson also brings into the board enriched skills and experience with the highlight been serving for fourteen years as a Director at Tesco Plc. The third key member of the board is the chief executive and executive director Mr. Jeremy Darroch who has been in the company since the year 2004. Mr. Darroch also has an excellent education background that has enabled him to serve as a council member of the Council for Industry and Higher Education. The fourth senior member of the board is Mr. Chase Carey who is a non-executive director and has an extensive skills and experience in media and Pay TV Sector (BSkyB Corporate, 2013). The other ten members of the board of directors are persons with rich educational background and extensive experience accrued while serving in different leadership positions in different sectors. 4.0 BSkyB’s SWOT analysis Strength According to Acur and Bititci (2004), the strengths denote on the factors that give an organisation competitive advantage and the strengths of BSkyB according to BSkyB Corporate (2013) include the large market share that comprises of more than ten million customers. Secondly, the company has a wide and established distribution network. The third key strength is innovation that enables it to offer high quality products and services. The other strength of the company is its widely visible corporate social responsibility that improves its brand image. Weaknesses Kaplan and Norton (2008), stated that weakness of a company denote on areas that are likely to cause its downfall. The main weaknesses of the company are that it requires a satellite to be fitted and secondly, BSkyB requires its customers to pay monthly subscription in order to view digital terrestrial television that other companies offer free of charge to their customers. Opportunities According to Krajewski et al. (2009), the company has a perfect opportunity of expanding to other European countries in order to increase its market share. Secondly, it has an opportunity of expanding its channel range and selling its other products to the existing and new customers. Threats According to Walters and Rainbird (2007), threats endanger the future survival of a business organisation and among the threats; facing BSkyB is the existence of free to air channels that attracts majority of budget customers. Another threat facing BSkyB is the fact that other competitors use cable instead of satellite dish and hence BSkyB requires additional cost to use (Starks, 2007). 5.0 Financial analysis In the financial analysis that was carried out, the report only focused on the profitability ratios of which De Toni and Tonchia (2003), stated they establish the extent of profitability of a business organisation. In the table below the report represents the profitability ratios of BSkyB and it can be noted that all of these ratios have a positive indication meaning that in the financial year ending 2012 the company recorded positive results. The net profit margin is slightly above the industry average, while the return on shareholders’ fund is 11% higher than the industry average meaning that the company’s shareholders earn well above other shareholders in the industry but less compared to Daily Mail & General Trust plc. Equally, the return on the capital employed is also well above the industry average meaning that the management functions within the organisation are well performed. Profitability ratio Formula Calculation Ratio/Margin Net profit margin Net profit after tax/Sales revenue*100 906/6791*100 13.34% Operating profit margin Operating profit/ Sales revenue*100 1243/6791*100 18.3% Gross profit margin Gross profit/Sales revenue*100 1243/6791*100 18.3% Net operating profit after tax margin NOPAT/ Sales*100 906/6791*100 13.34% Earnings before interest, taxes, depreciation, and amortization EBITDA/Sales*100 1189/6791*100 17.51% Return on ordinary shareholders’ fund Net profit after tax/ Ordinary share capital + Reserves*100 906/2167*100 41.81% Return on capital employed Operating profit/ Share capital + Reserves + Non-current liabilities * 100 1243/4634*100 26.8% The table below present profitability ratios of other competitors in the media industry, which include ITV, Informa plc, and Daily Mail & General Trust Plc. Additionally, the table also contains the industry averages. In comparison, it is only Daily Mail & General Trust Plc that outperforms BSkyB in terms of net profit margin. However, all of the three competitors have a higher gross profit margin when compared to BSkyB and this denote that BSkyB has a lower sales revenue or the operating expenses are high when compared to all of the three companies. Thirdly, all of the three companies have higher earnings before interest, taxes, depreciation, and amortization when compared to BSkyB whose ratio is below the industry average. This could be explained by the fact that maybe all of the three companies have more product offering compared to BSkyB thereby enabling them to earn more. In terms of return on shareholders’ equity, it is only Daily Mail & General Trust Plc, which offers the highest rate when compared to BSkyB meaning that its shareholders earn the highest return when compared to the shareholders of ITV, BSkyB, and Informa plc. However, the return on capital employed by Daily Mail & General Trust Plc is less even below the industry average because of high non-current liabilities. Profitability ratios ITV Daily Mail & General Trust PLC Informa plc Industry Ratios Net profit margin 12.15% 14.71% 6.56% 12% Operating profit margin 20.54% 44.41% 20.16 18% Gross profit margin 20.54% 44.41% 20.16% 18% Net operating profit after tax margin 12.15% 14.71% 6.56% 12% Earnings before interest, taxes, depreciation, and amortization 23.77% 18.23% 24.32% 21% Return on ordinary shareholders’ fund 32.66% 123.61% 37.79% 30% Return on capital employed 17.11% 13.54% 9.41% 15% Source: http://investing.businessweek.com/research/company/overview/overview.asp 6.0 Future financial prospects Presently, the BSkyB Corporation has an impressive financial performance however; according to Yip (2004), its future survival mainly depends on how it will handle its current weaknesses and threats. It was earlier noted that the strategic decision of the company is continuously improve and hence the strategic direction of the firm will always seek to ensure that the company improves on its weak areas and further eliminate the threats. Because the company currently has adequate financial resources as noted in the profitability analysis, it can be stated that it will seek to explore the opportunities that are available, which include venturing deep into the European market and increasing its range of products. By exploiting these opportunities, it is expected that the company will have larger market share and increased profitability. Additionally, the skills and experience of the company’s board of directors guarantees its stability and even future prosperity. 7.0 Recommendation Based on the analysis carried out it was evidently pointed out that presently the company has the largest market share in the Pay TV segment and this means that it is doing things right. Secondly, it was noted on the company’s mission and strategic direction that it aims at continuously improving its products and services in order to meet the needs and demands of their esteemed customers, and therefore, its more likely to record a increased customer number which translates to increased revenue and profitability. Thirdly, through the report, it has been noted that highly skilled and experienced directors whose contributions are most likely to make the company even more prosperous manage the company. Fourthly, through the financial analysis it has been established that the company is currently profitable even thou it has been outdone by Daily Mail & General Trust PLC but stills it’s perform is well above the industry averages. Conclusively, this report recommends that the pension fund managers should invest in BSkyB because this investment will grow as the company further grows by venturing into other markets and expanding its range of products and services. Collectively, the future prospects of the company means that investors of the pension fund will earn even higher returns in the future References Acur N. and Bititci U. (2004). A balanced approach to strategy process, International Journal of Operations & Production Management, Vol. 24 issue 4, pp.388-408; BSkyB Corporate (2013). About BSkyB. Retrieved from: http://corporate.sky.com/. Accessed on [16.04.2013] De Toni A. and Tonchia S. (2003). Strategic planning and firms' competencies: Traditional approaches and new perspectives. International Journal of Operations & Production Management, Vol. 23 Issue 9, pp.947-976 Horsman, M. (1997). Sky High: The Inside Story of BSKYB. U.K: Orion Business Books Horsman, M. (1998). Sky High: The Amazing Story of BskyB - and the Egos, Deals and Ambitions that Revolutionized TV Broadcasting. U.K : Orion Business Books Kaplan, R. and Norton, D. (2008). The Execution Premium: Linking Strategy to Operations for Competitive Advantage. Boston, MA. Harvard Business School Press Krajewski, L. Ritzman, L. and Malhotra, M. (2009). Operations Management (9th Edition). New Jersey; Prentice Hall Starks, M. (2007). Switching to digital television. U.K: Intellect Books Walters, D. and Rainbird, M. (2007). Strategic Operations Management: A Value Chain Approach. Hampshire, U.S, Palgrave Macmillan Yip G. (2004) Using Strategy in Change Your Business Model, Business Strategy Review, summer, 15 (12), pp. 17-24 Read More