Sky has probably fallen

Inevitable?

There was an air of inevitability over Fox’s second attempt to snatch Sky when the news filtered into the market last week. So the lacklustre share price reaction following news of an agreed deal on Thursday is little surprise. Sky had already run up as much as 37% since talk of an offer filtered into the market on 6th December.

The lack of surprise factor doesn’t entirely explain the tepid 0.5% rise of Sky’s stock on Thursday though. Sky shares remaining below the £10.75/share offer price points to scepticism. Such doubts do not—this time—lie primarily on the regulatory side. Critics of the split between Rupert Murdoch’s Fox and News Corp can rightly point to the permeability of the divide given that his son is chairman of Sky and CEO of Fox. In terms of governance though, that point is a non-starter now.

Grievances

It is the matter of valuation where material grievances lie. To begin with, Sky is worth 14% less than it would have been had the Brexit vote not happened, implying the stock would have closed at £9 on the day before Fox officially announced its initial offer. (In reality the stock closed at £7.895). So the 36% premium to Sky’s 8th December closing price looks more like a 19% mark-up, factoring in sterling’s devaluation. That is well below the 27% average UK takeover premium seen last year. We assume that was the rationale behind calls from one of Britain’s largest pension fund groups this week for an “appropriate” premium. The independent committee of directors Sky set up to consider the deal has also faced polite public pressure from institutional investors, on similar grounds.

Political momentum of concerns over concentration of media ownership could yet cause the Murdochs a few sleepless nights. However our assessment points to noise rather than material opposition. We don’t expect the Secretary of State for Media and Culture to refer the deal to Ofcom.

That should leave the shares in a range and some vocal shareholders disappointed. It’s certainly possible that the stock could, in time, have recouped all of its 33% loss between January and the year’s low in late November, without a Fox buy-out. That would, however, require a smooth ride for stock markets and the pound into Britain’s official Brexit notification to the EU, probably next March. Shareholders would also need to essentially ignore relentless inflation of Premier League broadcast rights, and continuing encroachment by Amazon and Netflix.

On balance then, we think the shareholder vote (likely to be held in February) will go for ‘jam today’, particularly given that only 75% agreement is required under the deal’s Scheme of Arrangement structure, instead of 90% under a straight takeover.