When Twenty First Century Fox (US:FOXA) first tabled it’s all-cash offer for the 69 per cent of Sky (SKY) it did not own, Barack Obama was president, Brits could still shop at Toys R Us and England had the Ashes. A lot has happened during the past 18 months. Sky has passed the time by bulking up its media assets, investing in new content and delivering forecast-beating revenues and profits. Meanwhile, it’s simple management buyout has turned into a transcontinental bidding war as two of the US's biggest media groups battle to bulk up their portfolios to fend off the rising threat of Netflix (US:NFLX).
By late 2017, Walt Disney’s (US:DIS) chief executive Bob Iger and Fox’s founder Rupert Murdoch had agreed to merge the two companies (including Fox’s 39 per cent stake in Sky) in a deal worth $65bn (£49bn). Four months later, the UK takeover panel ruled that if Disney wants Fox it would have to buy the whole of Sky, too. Fine by Mr Iger and his team, which have described Sky as the “jewel” in Fox’s portfolio.
But Mr Iger isn’t the only US media boss on a quest to boost his company’s portfolio. Brian Roberts, chief executive of Comcast (US:CMCSA), entered the fray in April with a £22.5bn all-cash offer for Sky – equivalent to 1,250p a share – which trumped that made by Fox more than a year earlier. For a while he was also winning the race to secure the rest of Fox thanks to his $65bn all-cash offer for Mr Murdoch’s company. Disney soon put a stop to that with its $71.3bn cash-and-shares offer which has received US regulatory approval.
The multi-layered takeover saga surrounding Sky
The dealmaking has sent Sky’s share price up 90 per cent since 9 December 2016 – the day before Fox made its first approach – and, unsurprisingly, the US group was this week forced to up its bid. But at 1,400p a share, the offer – which values Sky at £24.5bn – is less than some investors were hoping for.
Hedge fund managers including Seth Klarman at Baupost Group and Paul Singer of Elliott Management – which bought into Sky since the first offer was made on the assumption that it would spark a bidding war – have argued that Sky should claim a higher valuation. They think Disney upped its bid for its US peer to get its hands on Fox’s 39 per cent stake in Sky. And they have a point. At the end of June, Walt Disney raised forecasts for Sky's post-takeover adjusted cash profits by 27 per cent to £3.06bn for 2020. Subsequently, Mark Kelly at Olivetree Financial told the Financial Times that these new forecasts implied a valuation of up to 1,475p. Sky’s share price then peaked at 1,501p the day before Fox’s latest offer was made.
Re-enter Comcast. Shortly after the UK markets closed on 11 July (and after the IC's print deadline), the group matched the 1475p valuation forecast with a bid that values the company at £26bn. Sky's management once again withdrew its support for Fox's offer and recommended the second Comcast bid. It's an offer which values Sky at 12.2 times adjusted cash profits - considerably more generous than the either of the bids for Fox.
