Sky sitting pretty as rivals fight for growth

Sky sitting pretty as rivals fight for growth

Sky bidding has already provided shareholders greater returns than those tabled by 21^st Century Fox. Even with the stock 66% higher than November lows, it’s difficult to rule out further gains as competition amongst growth-hungry and Netflix-wary media giants intensifies.

The back foot

As things stand, after Comcast crashed Fox’s painstaking buy out of Sky, first movers, including Fox-suitor Disney, are on the back foot. Shareholder choice is improving. For one thing, purchase of Sky by the world’s largest cable broadcaster by sales would solve a politically-charged regulatory tangle. Comcast’s UK operations are negligible whilst Murdoch’s involvement in the British media has frequently pressured government to justify the benefits of his dominance. The merits of a less contentious deal for investors are obvious. Indeed, before Comcast’s entrance, all parties were awaiting publication of a final report that will spell out UK regulators’ recommendations. Separate editorial boards are one remedy Media secretary Matt Hancock will weigh in a decision due in the summer. As for the latest bid, it is “a commercial matter” for the companies involved, Downing Street said on Tuesday. However, the government has signaled it will not ignore the CMA’s view that a straight Fox takeover of Sky would not be in the public interest. The extent of official scrutiny could certainly influence shareholder voting.

Poor voting maths for Sky

The mathematics of such voting are not relaxing for Fox either. Its current 39% holding would be pitted against just 50% of shareholders needed for acceptance of Comcast’s offer. That poses a material risk that Murdoch won’t be able to block a Comcast offer. The break clause in Fox’s agreed offer is just $222m, hardly a punitive sum relative to takeover values so far. Murdoch’s Fox has the option of either raising its offer, or restructuring acceptance of Disney’s deal to exclude Sky. Like Comcast CEO Brian Roberts though, Murdoch has made it clear he wishes to own Sky outright. Walking away will be a wrench. As for Disney’s stance, CEO Bob Iger has declined to comment on Comcast’s move. Fox had yet to respond. Generally it would be fair to say Disney’s deal casts Sky as an annex rather than central. For Sky’s part, it pointed to the lack of a new official offer, though independent directors said they were minded of their fiduciary duty.

A “Perfect fit” and a near-perfect field

Commercially, Comcast sees its offer as superior, dubbing a pairing with Sky “a perfect fit”. That suggests it expects to take a large chunk out of 2017 operating expenses totalling $66.6bn. They were a multiple of slightly less than four of core profits. That compares with Sky’s 8.5 multiple to generate core profits of $2bn. Additional interest from U.S. cable No.2 Charter Communications could also be driven by a chance to improve efficiency, given that its operating margin is bottom-of-the-pack in the industry. It would also vault to the No. 1 spot by acquiring Sky. Either way, shareholders of the latter are already better off.