Closing Mediaset Premium would be the worst of the options on offer for the Italian broadcaster, but the status quo is not an option for Mediaset either, according to a report by financial analysts at Berenberg.

Having previously worked on the assumption that there a fresh deal between Mediaset and Vivendi would ultimately be agreed, Berenberg is now basing its assessment on no such agreement being struck – but its analysts believe the pay TV unit will either be sold, scaled back, or closed nevertheless, with a sale still the preferable option.

Mediaset and Vivendi are currently engaged in a ferocious legal battle following the French media company’s decision not to go ahead with the acquisition of the Italian broadcaster’s loss-making pay TV unit – a deal agreed in April that Berenberg believes is legally binding, but which now seems unlikely to happen given the rancour surrounding the case and the size of the gap between the two parties.

“It is our opinion that Mediaset will not tolerate losses at Premium forever. Rather, we see various options open to the company: selling the business to Vivendi or Sky; scaling it back (eg by not renewing the Champions League rights) to the small-scale pay business that was profitable before this foray into sports rights; or even closing it,” said Berenberg.

Berenberg said that a sale to Sky Italia, something that has been the subject of much speculation in recent weeks, “would make a lot of sense”, removing pressure on rights costs in the Italian market and eliminating losses for Mediaset. It said such an outcome would “be a major positive for Mediaset” and that “even a valuation of zero could represent a positive scenario compared with the current situation, in our view”.

In the case of closure, Berenberg estimates that shutting the service down next year after the UEFA Champions League season ends would involve a total cost of €842 million before tax, including operating losses sustained thus far. Shutting the service down in 2018 when rights agreements have expired would cost €448 million, which it believes is the worst-case scenario for the broadcaster.

However, even in the case of a 2018 closure, Berenberg believes that Mediaset is undervalued currently, reflecting its estimate of a current enterprise value of about €1.5 billion when debt is factored in.

The analysts set a price target of €3 for Mediaset’s shares, down from the €4.10 it set when it assumed a deal would be struck with Vivendi, but higher than the current price of about €2.29.

Berenberg estimates that Mediaset Premium will make a loss of about €223 million in EBIT terms this year, worse than previous forecasts because of additional operating expenditure related to meeting Vivendi’s demands for additional programming content as part of the original deal and because of a failure to grow its customer base – itself mostly a consequence of the dispute with the French media giant.

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