The merger of two little-known satellite television broadcasters on 2nd November 1990 was completed without much fanfare. Both Sky Television and British Satellite Broadcasting (BSB) had embraced the new way of beaming their programmes to viewers, but neither had been able to crack a market that was used to receiving a signal through an aerial and was understandably wary of dish receivers and ‘squarials’.
Simon trained at PriceWaterhouse in Australia before joining Taylor Nelson Sofres (now part of WPP) in 1994. He was responsible for business development appraisals and M&A. He was later appointed Senior Treasury Manager. In 2005, he was appointed Assistant Treasurer at Land Securities, a real estate investment trust. In 2010, he joined the BSkyB treasury as Deputy Group Treasurer and in 2011 was promoted to Group Treasurer. He is a Chartered Accountant and Associate Member of the Association of Corporate Treasurers.
Richard began his career as an accountant at BAE Systems, the defence and aerospace contractor. In 2006, he moved on to the group treasury, where he spent four successful years. He joined BSkyB as Treasury Manager in 2010. He is an Associate Member of the Association of Corporate Treasurers (AMCT) and an Associate of the Chartered Institute of Management Accountants (ACMA). He studied Classics at Jesus College, Cambridge.
Perhaps unsurprisingly, it was Sky that was to become the senior partner in what came to be considered less a merger and more a take-over. Sky had been refused a UK operating licence and as a result had rented transponder capacity on Astra1, a pan-European satellite shared by a number of continental broadcasters. What Sky did have, however, was a growing customer base and the beginnings of brand awareness among the larger public.
The product of the union, BSkyB, was to be a lean machine. Sky’s CEO, Rupert Murdoch, was keen to slough off as much of the partner business as possible. As a result, BSB’s two satellites and its headquarters, Marco Polo House, were quickly sold off. The latter’s programming schedule was also scrapped in favour of Sky’s more populist offering.
Having manoeuvred itself into the mainstream of the British TV television market, BSkyB went on to redefine the landscape of subscription TV in the UK. In just over two decades, the company has grown from a plucky upstart with just four programmes in its schedule to the UK’s largest pay-tv service – in 2010 (November), its ten millionth customer subscribed.
BSkyB’s headquarters are located in Isleworth, a small town in the west London borough of Hounslow. It was here that Murdoch had established the original Sky Television in 1983. The group’s five-man treasury team is to be found on the same site. It consists of: the Group Treasurer, Treasury Manager, Senior Treasury Controller, Treasury Controller, and a Treasury Analyst.
Richard was appointed Treasury Manager in 2010 after seven years in the accountancy and treasury departments at BAE, the defence contractors. “It is a good company and their group treasury is fairly active in a number of areas, making it an interesting place to work, but the move to Sky represented a promotion. The company continues to grow quickly and the future promises to be bright.”
In his current role, he reports directly to the Group Treasurer, Simon Morley, and handles the group’s FX trading, interest rate hedging, and cash investments. “I wear two hats. I support the Group Treasurer on any capital market activity. We don’t have a lot of bank guarantees but when we do I lend my expertise to that. Simon and I work side-by-side on a daily basis.”
The treasury has no international subsidiaries, but it does use a shared service centre in Livingston, Scotland, where the group’s back office tasks are handled. “There is a drive to make the system as streamlined as possible. The shared service centre pulls together our cash forecasts and they make payments for us. We have daily contact with the team up there.”
In June 2010, Murdoch’s News Corporation, which owns a controlling 39.1% of BSkyB’s shares, bid £7.5 billion for the remaining 60.9%. A phone hacking scandal at News International, the News Corporation subsidiary that publishes the London Times and The Sun newspapers, thwarted the takeover. BSkyB received a £39m break-fee as a result to cover costs.
In this interview, Richard and Simon tell us more about their roles and the BSkyB treasury.
Which bank(s) do you bank with?
RW: We have a long standing relationship with our main cash clearer, the Royal Bank of Scotland. If you ask any treasurer you’d need a good reason to change your clearer because their systems are embedded. In Sky’s case closing down those accounts would mean contacting over 10m customers; that would be a significant decision, but not impossible of course. Our group of major UK, European and US banks provides us with a full range of ancillary services and products from FX to investment banking.
How do you measure your counterparty risk? Has that changed given the situation in Europe, for example?
RW: We set counterparty credit limits based on a range of metrics, and obviously we keep them all under constant assessment. Credit ratings are the most important factor driving the credit limits, however we also monitor CDS and keep tabs on what’s going on in the news.
We don’t have a hard and fast limit on CDS spreads, rather using them as an additional indicator. The volatility of CDS prices would make it difficult to base a credit policy on them. For example, current levels are dramatically different from those seen before the credit crunch.
Do you have counterparty limits on what you do with your short-term cash?
RW: We have four sterling money market funds to choose from. They need to be of the right size so we are not running into cash concentration issues and they need to be AAA rated.
When it comes to short-term cash, you have to be aware of the counterparty credit risk you are exposed to. Equally, we are very aware of the yield we are getting. Better yield can be earned on longer-term deposits or with certain counterparties, but they will tend to be riskier. It is important to balance those two competing variables.
At the moment, Sterling money market funds are yielding around 70 basis points. It is not a great deal, but equally it is not a million miles away from two month deposit rates and of course the funds provide instant access to liquidity. So would we be better off putting our cash in a MMF than depositing with a single bank for that term? In the end we have a mix of cash in MMFs and cash on term deposits of different tenors.
In terms of the group’s total cash, we limit our exposure to any one bank to a percentage of our total cash. ‘LIBOR plus’ style floating rate deposits help to match off some of our LIBOR exposure on cash and debt.
You mentioned credit ratings. How much faith do you place in them?
RW: It is not absolute. They are still important, but equally they aren’t as responsive as the more liquid markets like CDS. Although on saying that, CDS markets can throw up some spurious data. It is really about building up as complete a picture as possible on your counterparties and taking a very broad view.
Does BSkyB have a credit rating and do you feel it is worthwhile given the cost?
SM: You need a credit rating before you consider issuing public bonds in the capital markets. Clearly the costs of obtaining and maintaining a rating need to be factored into your overall funding rates, but it does support your ability to raise long-term funding beyond the bank lending horizon.
We are investment grade, rated BBB+ by Standard & Poor’s, BBB+ by Fitch and Baa1 by Moody’s. We have a policy of maintaining a strong BBB rating and have plenty of headroom. There are very good reasons why it is important to be investment grade – it influences funding costs and the type of markets you can tap.
Could you explain a little more about the company’s debt situation?
SM: We are ahead of the curve that suggests corporates will move towards a greater proportion of capital markets funding rather than rely so heavily on bank debt. Our bonds total, in aggregate, $2.5 billion and £700m with maturities between 2015 and 2035. All dollar debt is hedged into sterling with cross-currency swaps.
We don’t have bank debt outstanding, but we do have a £750m revolving credit facility with 11 banks. The facility is our liquidity backstop. It is cash available on a short-term basis and has been undrawn for quite some time and should remain so.
Does technology play a big role in BSkyB’s treasury? If so, which TMS/ERP system do you use? Also, do you still use spreadsheets?
SM: For the TMS, we have gone for Quantum, a SunGard system for which we have recently completed an upgrade. The ERP system is JD Edwards – it is more of an accounting system. The JD Edwards ERP spans the whole group and links with our CRM systems. BSkyB has grown organically and we have always used the same ERP across the board so it makes sense to have that system in the treasury, too.
We generally transact plain vanilla deals, although our hedge accounting is quite complex, so we just need an appropriate system that can manage those types of transaction for us. We do still use spreadsheets from time to time. They are very useful for any kind of offline analysis and they allow greater flexibility than system generated reports.
What are your main currency exposures and how are they managed?
RW: BSkyB has a business in the Republic of Ireland, where we have euro-denominated subscription revenues. We also have some large euro costs. The rental of the satellite transponder capacity, for example, is charged in euros. This means we have a nice offset there against the euro income stream.
And there are some other euro-denominated costs relating to the Ireland business that offset the subscription revenues. We have a net euro receivable, which is almost entirely related to the Irish business.
We have Bank of Ireland euro accounts to receive the Irish subscription revenues. The surplus euros are swept back to a euro account with RBS in the UK.
Our greatest exposure is in US dollars. Electronics supply chain costs tend to be in dollars, and we have an exposure related to the manufacture of our set-top boxes and routers for video on demand and broadband services.
We also purchase a number of TV and movie rights from the United States. Contracts with the major Hollywood studios or HBO for example are dollar-denominated. We hedge our FX exposures in line with the treasury policy, generally using FX forwards. We have small amounts in other currencies, but nothing material.
More and more corporates seem to be using portals for their trading needs. Do you use FX/MMF portals – if not, why not?
RW: Historically, we haven’t felt the need. Trading over the phone works for us right now, but we are looking more actively at FX portals now both because our volumes have increased in recent years and for more efficiencies from STP. All of our banking business is directed toward our relationship banks so they get our FX business.
It is true to say the use of FX portals would cut down on direct contact with our banks, but perhaps only afford minimal efficiency savings for us in the long run. As things stand, we are confident that the prices we get from our banks are very competitive. True, there’s no guarantee you get the exact spot price you see on your terminal, but we know where the market is and are able to execute at the right price.
Do you hedge your interest rate risk?
RW: The finance director wants a degree of certainty over what our interest charges will be – we can achieve this by having fixed rates of interest on our debt. The group’s hedging policy requires that between 50% and 75% of borrowings are held at fixed interest rates.
The cash on the balance sheet is of course effectively at floating rate. You’d want a certain amount of debt at floating rate to match that, which brings an element of natural offset in the short term.
What plans do you have for process enhancements in your treasury or are there any significant projects on the horizon?
SM: We are hoping to improve our treasury payments systems and processes. Our back office support is based up in Scotland and we are working on improving the flow of information between London and Scotland with straight through processing (STP). So for example, money market deposits or FX trades will be processed more efficiently.
In an ideal world, we will key in the trade and then there will be no need for further human intervention – the payment will go from the TMS through to the banking system in Scotland. At the moment, there is duplication of manual input by treasury and by the shared service centre.
We have a large focus on business partnering to provide opportunities to release value throughout the business and its supply chain. This includes working with commercial teams to ensure all FX exposures are captured and actionable, as well as understanding those financing areas which allow treasurers to reciprocate with the banking group that gives up its balance sheet.
How do you see the euro crisis developing?
RW: We are acutely aware of the pressures on our banking group from the euro debt crisis. The ramifications of another Lehman Brothers style collapse would be massive; all banks would be caught up in it because global financial markets are so interconnected. Although you can’t have blind faith in all the Eurozone governments bailing out their respective institutions, it seems to me unlikely that the Lehman Brothers scenario would be allowed to happen again.
From a treasury point of view, there are a lot of unknowns out there and that’s having an impact on the money markets and how banks can fund themselves. We are monitoring the whole picture and the impact it might have. As I said before, it is imperative that we are aware of our counterparty credit risk in the current climate. Capital protection is fundamental. We have the group’s cash spread around the banking sector and you have to think very carefully about where you are putting it.
And finally, what does the uncertainty surrounding the position of the Murdoch family at News Corp mean for BSkyB and its treasury?
SM: The independent directors at Sky demonstrated how robust the corporate governance was during the bid process, and it was very much business as usual. The issues at News International were for them to respond to and were not related to Sky.
Sky treasury operates independently from News Corp, and continued to do so throughout the offer period, so there was no impact on us beyond understanding the potential timetable and related activities had the transaction proceeded. There was a strong emphasis on keeping our focus on delivering the business plan, just like the rest of the business, rather than being distracted by the offer, as you may have seen from our Q1 results.