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Fox sniffs out a bargain with Sky bid

The pay-TV broadcaster and 21st Century Fox have agreed a possible takeover deal
Fox sniffs out a bargain with Sky bid

Five years on from its last attempt, the Murdoch family has mounted another bid to take control of Sky (SKY). Twenty-First Century Fox (US:FOXA), which owns 39.1 per cent of the pay-TV broadcaster, has tabled a possible cash offer of 1,075p a share that values the company at nearly £18.5bn. James Murdoch, son of media tycoon and Fox co-chairman Rupert Murdoch, is Fox's chief executive and Sky's chairman. The offer, which represents a premium of 36 per cent to Sky's share price just before news of the deal broke, has won preliminary approval from Sky's independent directors. But it could leave investors wanting more.

IC TIP: Hold at 997p

News Corp tabled a £7.8bn bid for Sky in 2011, two years before Rupert Murdoch split the company into Fox, which houses its film and television businesses, and News Corp (US:NWSA), home to The Sun, The Times and other publications. However, the media titan backed away following the revelation that journalists at its News of the World newspaper hacked the mobile phone of murdered schoolgirl Milly Dowler - the political and public backlash against the Murdoch family made the deal unworkable. James Murdoch resigned as chairman of Sky - then BSkyB - in April 2012, but stepped back into the role earlier this year, reigniting speculation of a Fox buyout.

Sky's shares have slumped this year due to Brexit-related uncertainty, weakened sterling, fierce competition from rivals such as BT (BT.A) and Netflix (US:NFLX), and surging content costs - it shelled out close to £4.2bn to retain its share of Premier League broadcasting rights in 2015, nearly double the sum it paid in the previous auction. The shares were trading close to a four-year low when Fox made its move; the offer sent them up more than a quarter. There are clear conflicts of interest: along with James Murdoch, Sky board members John Nallen and Chase Carey hold top positions at Fox. Accordingly, Sky's other eight board members have formed an independent committee to handle the negotiations.

The latest offer is unlikely to encounter as much resistance as its predecessor, but could still face significant political and regulatory scrutiny. The government may look kindly on the deal as it showcases the UK's continued attractiveness to foreign investors and promises to shore up market confidence. It should also be more open to a foreign takeover than the previous coalition government. However, prime minister Theresa May might feel pressured to prove she can stand up to big business. Similarly, regulator Ofcom may decide that a better-funded Sky would be able to invest and innovate more, boosting competition in the telecoms sector. But it recently took a tough line against BT, threatening to force the telecoms giant to legally separate its Openreach division from the rest of its business. It might require Fox to spin off Sky News to dilute the company's control over the nation's media - the same compromise it made with News Corp last time around, before the deal was scrapped.

Fox is likely to trumpet the deal as a way to secure the UK's position as a global media and innovation hub. It may also downplay competition concerns by highlighting the growing roles of Facebook (US:FB), Google-owner Alphabet (US:GOOGL) and Netflix in news and entertainment consumption - trends that have tempered the influence of television and newspapers. However, the deal comes within months of News Corp's takeover of Wireless, owner of leading sport radio station talkSPORT, compounding concerns about the Murdoch family's control of UK media. Sky's positive medium-term outlook could also embolden investors to demand a better offer: broker Numis expects adjusted pre-tax profit to jump 15 per cent to £1.43bn in the coming financial year, driving EPS 16 per cent higher to 67.2p, up from a predicted £1.24bn and 57.9p in the current financial year.