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Sky - Comcast respond with higher bid

Nicholas Hyett | 12 July 2018 | A A A
Sky - Comcast respond with higher bid

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US media giant Comcast has improved its all-cash offer for Sky to £14.75 per share. The offer values Sky at $34bn (£26bn) and pips 21st Century Fox's offer of £14.00 a share made a day earlier.

The offer has the backing of Sky's independent directors, but would still require shareholder and regulatory approval.

The shares rose 2.9% in early trading.

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Our View

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

Comcast - owner of Universal and NBC - is currently leading the dance, but it wasn't first to the party.

In December 2016, Rupert Murdoch's 21st Century Fox came to an agreement to acquire Sky for £10.75 per share. That wasn't a great surprise. Fox has long held a significant stake in Sky, and Murdoch has tried to resume control of the business he launched in 1989 before.

Unfortunately for Fox, that tie-up was delayed by competition and political inquiries. When those concerns faded away, a new problem arose. Rival US media group Comcast weighed in with a £12.50 per share offer.

Comcast's interest may have been spurred on by Sky netting the rights to 3 more years of Premier League football at a reduced cost. Quite a coup given previous price momentum.

We've since seen Fox and Comcast trade bids, through £14.00 and now $14.75.

Fox itself is the subject to a bidding war between Comcast and Disney. Disney's $71.3bn offer means it's currently in pole position in that race, and Fox's existing stake in Sky would pass to them if things stay as they are. A Sky divided between Comcast and Disney isn't a natural endpoint for either player, so an improved offer from Fox shouldn't be ruled out.

Sky has been a strong performer over the years, having consistently led the way on content and innovation. But with each round of bidding the risk of overpaying grows. Still, with the cash on offer already 37% above where Fox opened the bidding, that won't worry Sky shareholders too much.

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Third quarter trading details (at constant currency) - 19 April 2018

Over the nine months to 31 March 2018, revenue rose 5% at constant currency to £10.1bn.

With adjusted operating costs remaining flat, EBITDA (earnings before interest, tax, depreciation and amortisation) rose 10% to £1.7bn.

UK & Ireland revenues rose 4% to £6.7bn, driven by an extra 285,000 subscribers since the equivalent period last year and the continued growth of Sky Mobile and Sky Q. Good operating cost control ensured EBITDA rose 14% to £1.5bn.

In February, Sky signed a deal to extend its Premier League coverage for another 3 seasons from 2019. The rights were secured at cost of 16% less per game. This was followed by an agreement with Netflix and Spotify to make these services available on Sky packages. The Netflix deal also covers the European businesses.

In Germany & Austria, Sky has focused on upgrading its products and services, with numerous improvements, including the roll-out of the Sky Q service from May, targeted. This has seen customer acquisition costs and churn rates rise, with some lower value customers leaving.

While revenues rose 6% to £1.5bn, higher Bundesliga costs ensured EBITDA was £68m, down from £83m last year.

In Italy, revenues rose 5% to £2bn. October's price increase and strong increases in advertising and content more than offset the impact of a slight fall in customer numbers, which Sky attributes to the ongoing dispute with Telecom Italia.

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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.

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.