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Sky - US group Comcast in bid to outflank Fox

George Salmon | 27 February 2018 | A A A
Sky - US group Comcast in bid to outflank Fox

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In December 2016, 21st Century Fox made a takeover approach and Sky's independent directors reached an agreement on a price of £10.75 per share, to be paid in cash. This represented a 40% premium to the closing price the day before Fox's initial approach.

However, on 27 February 2018, Comcast, the US cable operator announced a rival proposal to buy Sky, with a cash offer of £12.50 per share. This values the group at £22.1bn.

The shares rose 18.3% to just over £13 per share.

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Our View

With Sky on the receiving end of all-cash takeover bids, recent results have, in the most part, been something of a sideshow for investors.

21st Century Fox was the first to enter the fray. In December 2016 it came to an agreement that would see Rupert Murdoch resume control of the business he launched in 1989. The price was £10.75 per share.

Fox's bid came as no real surprise. Even after taking Sky public, Fox retained a significant interest, and had described its 39.1% stake as 'not a natural end position'. The group was forced to pull the plug on a bid in 2011 amid public outcry over the involvement of News Corp, then Fox's parent, in the phone-hacking scandal.

Fast forward to February 2018, and the deal still hadn't completed. Sky then secured a major coup, netting the rights to even more Premier League football over 2019-2022 at a reduced cost.

This pricked up a few ears, and spurred Comcast, the US based cable operator, into action. Its offer is a higher one, £12.50 per share. It's hard to see why Sky's independent directors would accept a £10.75 bid from Fox, then turn down this one.

Any takeover has to get past shareholders and competition rules, but we can't imagine James Murdoch, son of Rupert and board member at both Fox and Sky, is too pleased a rival has gate-crashed Fox's party.

Fox returning with another offer shouldn't yet be discounted. A Sky-Fox tie up has always had concerns over media independence hanging over it, but the fact Fox is itself on the cusp of being bought by Disney seems to have eased regulatory worries.

Sky has been a strong performer over the years, having consistently led the way on content and innovation. With the Premier League rights under its belt for another 3 years, whoever lands the group will have secured an attractive asset.

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Half year results (25 January 2018)

Group revenue rose 5% to £6.7bn, with underlying earnings before interest, tax, depreciation and amortisation (EBITDA) up 10% to £1.1bn. This increase came as better operating efficiency helped offset the cost of rolling out new services like Sky mobile and Sky Q, plus a £72m increase in costs from German Bundesliga rights.

Geographically, Sky saw revenues rise in every region. Growth in the UK & Ireland was 4%, taking half year revenues to £4.4bn. Revenue in Germany & Austria rose 8% to £1bn, with Sky Italia delivering £1.3bn, a 4% rise.

Retail customer numbers rose by 284,000 to 22.9m, with increases in the UK & Ireland and Germany & Austria more than offsetting a slight decline in Italy. Customer churn in the UK was 11.2%, down from 11.6% last year. However, a high number of expiring contracts saw churn in Germany & Austria increase to 14.2%, with Italy remaining stable at 9.6%.

During the half, Sky announced a wholesale agreement with BT. This will give Sky customers the option of adding BT Sport to their TV package from early 2019.

Sky declared an interim dividend of 13.06p per share. This follows the 10p due to those holding the shares on 12 January, as a result of the Fox deal not getting over the line in 2017.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.