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Sky - Fox back on the scene with 24.5bn pound offer

George Salmon | 11 July 2018 | A A A
Sky - Fox back on the scene with 24.5bn pound offer

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21st Century Fox has returned with another bid for Sky.

Fox is willing to pay £14.00 per share, which is not only a step up from the group's original £10.75 offer, but also leapfrogs Comcast's £12.50 proposition.

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

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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.

Rupert Murdoch's 21st Century Fox, which is itself in the process of being bought by Disney, is currently in the driving seat. But it's had to work harder than it might have liked to get there.

In December 2016, it 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 threatened to spoil Fox's party 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.

Comcast coming back with an improved offer shouldn't be ruled out. But as things stand, it looks like control of Sky will ultimately pass to Disney, as a result of its $71.3bn takeover of Fox.

Sky has been a strong performer over the years, having consistently led the way on content and innovation. Combining it with Fox Sports and ESPN would give Mickey Mouse and co a formidable portfolio.

The one nagging thought we have is how many more rounds can there be in the bidding war? Given the rapid escalation of bids, we must be nearing the point where one drops out.

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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. 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.