Approach sends Sky high

The offer values Sky at around £12.3bn but investors put their money on a far bigger payday, sending the shares shooting to the top of the FTSE 100 leader board on Tuesday after jumping 17 per cent to 703p, a five-year high.

Sky immediately rejected the proposal arguing that it “significantly” undervalued the company but since News Corp already owns a 39 per cent stake in the business, a deal seems likely.

But any such deal would need to be rubber-stamped by UK regulators since it would tighten News Corp’s grip on vital UK newspaper and television interests. News Corp owns The Times, Sunday Times and The Sun newspapers here in the UK, plus Wall Street Journal and Fox television in the US. BSkyB was recently forced to sell down its 17.9 per cent stake in terrestrial broadcaster ITV to 7.5 per cent on Ofcom orders.

But this has not stopped market gossips talking up the potential of a deal. Broker Singer Capital Markets fanned the flames by suggesting that the shares could be worth as much as 860p per share. “Given the quality/cashflow generation of the business investors may well focus on an 11 to 12-times PE [ratio] for 2011 as closer to fair value,” argues Singer analyst Johnathan Barrett. “This suggests very significant upside of around 785p to 860p [per share]”.

Hopes that an offer could go quite that high seems unlikely after Sky directors admitted that they would likely recommend an offer of 800p per share, about £1bn more than is currently on the table. Financing such a deal is unlikely to be a huge problem for News Corp given its total assets of around $55bn (£37bn) as of March this year, and pre-tax profit of $1.16bn (£774m).

Sky has built its subscriber base to close to its 10m target thanks to Premiership football. Last week it paid £160m for Virgin Media’s subscription TV channels, including Living, Bravo and Challenge.