July 11, 2018

Breakingviews: Sky’s The Limit

by Breakingviews.

Sky shareholders seem disappointed by Twenty-First Century Fox’s 24.5 billion pound offer. They needn’t be. Rupert Murdoch’s latest bid is way more than the British pay-TV group is worth, and anyway just sets a new price floor for Sky.

Fox on Wednesday hiked its offer for the 61 percent of Sky it doesn’t own to 14 pounds per share, compared with an original 10.75 pounds in December 2016 and rival Comcast’s 12.50 pounds. Those comparisons are skewed, since the earlier offers also came with further dividends. The final antitrust hurdle for Fox is getting thumbs-up from new Media Secretary Jeremy Wright for its competition remedies, including handing Sky News to Fox suitor Walt Disney. That approval should come by tomorrow.

Shares in Sky, which have long priced in a bidding war, fell 1.4 percent to 14.80 on Wednesday morning. That’s probably because Fox’s bid is a touch below the 25 billion pounds price tag the Financial Times reported Murdoch was set to offer. Sky’s board also allowed Fox to potentially reduce the acceptance threshold for its bid to a simple majority rather than a majority of outside shareholders. In theory that means it could succeed if just 11 percent of investors tender, since Fox owns almost two-fifths of the British group.

Still, the good outweighs the bad for Sky investors. The valuation including debt of 13.5 times consensus 2018 EBITDA is way above the trading multiples of between eight and nine for Sky’s peers, using estimates compiled by advisers to Disney. Britain’s Takeover Panel, meanwhile, could push it higher. Since Disney upped its offer for Fox assets by 36 percent to $71 billion, the M&A watchdog is considering whether the Mickey Mouse owner should extend a higher price to Sky’s other shareholders. Using the same bump would hand Sky investors 14.59 pounds per share.

Crucially, Wednesday’s offer documentation confirms $156 billion Disney’s willingness to stump up for Sky. The Californian group will reimburse Fox the difference between 13 pounds per share and 14 pounds if the wider tie-up with Fox fails. And any attempt by Comcast to disrupt that cosy marriage would just intensify the Sky bidding war. The UK group’s shareholders have no reason to be glum.


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