Why Murdoch must up his bid for Sky
12th December 2016 12:41
by Lee Wild from interactive investor
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On Friday, about half-an-hour before trading finished for the week, confirmed it had received an approach from Rupert Murdoch's .
It shouldn't come as a surprise, perhaps, that the news had leaked, a 6% surge in the share price forcing Sky's hand. But while the offer was at a big premium to the current price, many think Fox is getting the satellite TV giant on the cheap.
Fox, which already owns 39% of Sky, is prepared to pay £10.75 a share in cash, minus any dividend paid in the meantime. That values the business at £18.5 billion. Independent directors on both sides are happy with the price, although talks to fine-tune terms are ongoing.
It's the second time Murdoch has tried to buy Sky. The News of the World phone hacking scandal forced him to abandon a 700p-a-share offer made by News Corporation in 2010. And, although a new deal will likely be subject to a regulatory review, most expect Ofcom to wave it through. Fox must confirm its intentions by 6 January.
On paper, the deal also seems like a sensible move, replicating the planned $85 billion (£67 billion) tie-up between content distributor and content producer . But price could be a major issue.
It is a 40% premium to the 6 December closing price, the day before Fox made its approach. And Sky has had a terrible time in recent month, plummeting over a third from £11.34 in February.
Of course, Brexit was an issue, and we discussed worries about high costs and fierce competition from , and BBC iPlayer when Sky published first-quarter results in October.
But Sky was trading above £10.75 as recently as March, and there are serious concerns about how talks ended up at that price, especially since James Murdoch runs Fox and is chairman of Sky.
"We would hope this is a starting bid and on reflection they will appreciate that a higher bid is more appropriate," Thomas Moore, investment director at minor Sky shareholder Standard Life Investments, told the BBC.
Numis's Paul Richards says Sky has a 'FTSE 100-sized opportunity in mobile'"We understand the timing of the offer as Sky shares have been impacted by Brexit, structural and competitive concerns while foreign exchange movements have made a bid in dollar terms even more attractive," said Paul Richards at Numis Securities Monday.
"We concur with weekend press comment from shareholders that the offer price is low, though given the absence of a likely rival offer and agreement from independent directors, it may prove difficult to extract a materially improved bid."
Richards, who rates Sky a 'buy' with 1,250p price target, thinks UK content prices have peaked, that subscription video on demand services are complimentary to pay-TV, and that Sky has a "FTSE 100-sized opportunity in mobile".
Polo Tang at UBS also believes Fox would be getting a bargain at £10.75p. That bid puts the shares on a multiple of 15.9 times his own earnings per share (EPS) forecasts for 2017. On consensus estimates it's 17 times versus a 10-year average of 16.
"However, we believe EPS is at a low point for FY 2017 given the recent step up in Premier League rights and investment in Germany/Italy and mobile and that EPS for FY 2018 and beyond has been underestimated," writes Tang, who has a £13.10 price target on Sky.
"Sky expects 5-7% per annum revenue growth medium-term and this should deliver mid-to-high teens EPS growth.
"We think these assumptions are conservative and think consensus has underestimated upside from Sky launching in mobile, growth in Germany and benefits from Sky launching a pan-European OTT offering under its Now TV brand."
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