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BSkyB Faces Cadbury Conundrum as Murdoch Bid Talks Near

News Corp. COO Chase Carey
Charles "Chase" Carey, chief operating officer of News Corp., says that British Sky Broadcasting Group Plc’s stock may already be trading too high. Photographer: Andrew Harrer/Bloomberg

British Sky Broadcasting Group Plc’s board may come under pressure to push Rupert Murdoch’s News Corp. for another 2.2 billion pounds ($3.6 billion) as hedge funds flow into shares of Britain’s largest pay-TV provider.

As the U.K. government considers whether to give final approval for the takeover, institutions have reduced their holdings in BSkyB since November, according to data compiled by Bloomberg and research firm Data Explorers. Hedge funds have moved in as a possible deal nears, the data show.

“As you get closer to the endgame and the process becomes clearer, you begin to have people who come in just to place a bet on the price,” Scott Moeller, professor of finance at Cass Business School in London, said in an interview. “People are building the bid into their expectations.”

Should the government stand by its preliminary decision to clear the acquisition, News Corp. will start negotiations about its bid for the 61 percent of Isleworth, England-based BSkyB it doesn’t already own. The risk for BSkyB’s board is that New York-based News Corp. may walk away if shareholders push for a price above the current market value, sending the shares back toward levels before the takeover offer.

The influx of funds at a time of bid negotiations may be reminiscent of Kraft Foods Inc.’s takeover of Cadbury Plc in 2010, when Chairman Roger Carr and Chief Executive Officer Todd Stitzer agreed to sell the maker of Dairy Milk chocolate bars after leading a five-month campaign against the deal.

Influencing the Sale

Short-term traders globally owned 31 percent of Cadbury’s shares before the final deal, Carr said in February last year, saying it was the “shift in the register that lost the battle for Cadbury” and that short-term investors “unduly” influenced the sale.

BSkyB in June rejected the initial 700 pence a share offer, valuing the stake at 7.8 billion pounds, saying it wants at least 800 pence. The stock rose 0.3 percent to 844.5 pence as of 10:19 a.m. in London trading today.

Citigroup Inc. analysts including Thomas Singlehurst said News Corp. may be willing to pay 900 pence to 1,000 pence per share. Michael T. Shannon, who co-manages the $4.3 billion Merger Fund for Westchester Capital Management Inc., which owns shares of BSkyB, said the company is worth at least 900 pence a share.

While some investors are pushing for a deal, News Corp. Chief Operating Officer Chase Carey, who is leading the bid for the broadcaster, says that BSkyB’s stock may already be trading too high.

‘Clearly Troubling’

“The movement in the Sky stock price is clearly troubling,” Carey said on a conference call with analysts on May 4. The company’s profit and cash flow “validate the premiums Sky was trading at last summer but not a whole new premium on top of the pre-existing premium.”

The stock closed at 600.5 pence on June 14, the day before News Corp. announced the initial bid.

Institutional investors in BSkyB have reduced the number of shares they offered on loan by more than one-fifth from a high of 291 million in November, according to data compiled by Bloomberg and Data Explorers. News Corp. in December won European Union approval to take full control of BSkyB ahead of the U.K. review.

The proportion of the company’s stock available to be borrowed has fallen from 17 percent to 13 percent in the same period.

BSkyB spokesman Robert Fraser declined to comment on the shift in the shareholder register.

The incoming shareholders are typically hedge funds, Data Explorers said in a report. Data Explorers gathers global securities lending data every day on assets held by more than 20,000 institutional investment funds. The company’s database represents more than 85 percent of global transactions.

‘Significant Gap’

Very few investors are betting that a takeover will not happen, according to the data. Less than 1 percent of shares outstanding are being bet on a decline in the share price.

When BSkyB’s independent directors, led by Nicholas Ferguson, chairman of SVG Capital, rejected News Corp.’s offer in June, they said there is a “significant gap” between the proposal and the company’s value.

News Corp. wants full control of BSkyB to gain access to the broadcaster’s increasing cash flow. BSkyB may also help Murdoch make News Corp.’s newspaper business more profitable by allowing him to bundle newspaper and pay-TV subscriptions and spread content over several media platforms.

U.S. hedge funds including Taconic Capital Advisors, co-founded by Frank Brosens, and Perry Capital LLP have disclosed stakes in BSkyB since the bid was announced, joining longer-term funds Odey Asset Management and Taube Hodson Stonex Partners on the register.


New York-based Taconic, which first disclosed a stake in February, has a holding worth 272 million pounds. Taconic Capital co-founder Kenneth Brody declined to comment. Perry Capital’s stake is worth 139 million pounds. A spokesman for Perry Capital didn’t return calls seeking comment.

“You can’t blame it on the hedge funds,” said Cass’s Moeller, a former investment banker with Morgan Stanley. “The hedge funds don’t get the shares unless somebody else is selling out.”

The takeover of Cadbury by Kraft for about 13.6 billion pounds is a “relevant precedent situation,” said Alex de Groote, an analyst at Panmure Gordon in London, adding that different funds manage their portfolios for different risk and reward profiles.

At the time, many of the short-term holders in Cadbury had an annualized return of 33 percent over a six-week period, Carr said.


The U.K. government is considering whether to grant full approval for the takeover, after News Corp. in January offered to spin off BSkyB’s 24-hour Sky News channel to address media concentration concerns and avoid a longer review.

The approval process has been slowed down because of the high level of detail regulator Ofcom has to examine and it may take longer than two weeks before a decision will be announced, a person familiar with the negotiations said May 9. Spokespeople for the government, Ofcom, BSkyB, and News Corp. declined to comment.

While some hedge funds may push for short-terms gains, others say their BSkyB investments are for the long term, including Taube Hodson Stonex, which has held stock in BSkyB since 1998.

“We would like to remain shareholders for a very long time,” said Cato Stonex, a fund manager at Taube Hodson Stonex, which manages 10.3 billion pounds and also owns stock News Corp. “There ought to be some premium for taking control, otherwise we would be happy to enjoy the growing dividends.”

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