Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Leila Abboud is a former Bloomberg Gadfly columnist.

Sky Plc is ready to back a low and opportunistic takeover offer from Rupert Murdoch's 21st Century Fox Inc.

Investors had been speculating that the media mogul would bid for the 61 percent of the U.K. satellite broadcaster he doesn’t already own. They might have hoped for more of a fight from the company's independent directors.

There is no deal yet. Sky on Friday said it had received an approach from Fox worth 1,075 pence a share, or 11.3 billion pounds ($14.2 billion) for the freely traded stock. The directors not linked to Murdoch formed an independent committee to assess the offer and have backed the price, but are still negotiating on other terms.

Smells Like Opportunity
Rupert Murdoch renewed his pursuit of Sky after its shares took a tumble amid cost pressures from expensive content
Source: Bloomberg

The mooted offer is a 42 percent premium to where the shares were trading on Monday before bid speculation crept into the stock. But it's only 26 percent above Sky's three-month average share price and well below the post-tech-boom high of 1,141 pence a share touched last year.

Sky's problem is that it's unloved by the market and that has given Murdoch a chance to strike. The shares have tumbled this year as investors lost faith in pay television and fretted about competition from the likes of BT Group to Netflix Inc., as well as higher content costs  -- especially for sports.

The company held a big investor day in October at which it hinted -- without being explicit -- that it was aspiring to deliver earnings of 1 pound share in 2019, double what it made in its last financial year. Investors just yawned. Some griped that no new official targets were given.

In the Doldrums
Analysts' outlook on Sky's earnings potential has gotten decidedly more dreary
Source: Bloomberg

The bull case is that right now, Sky's performance is stuck in a trough because it is bearing the pain from investments yet to deliver, including new services and content. A mobile launch in the U.K. could spark some growth. Altogether, that could be the basis of an argument for a better price than the one on offer here, which is the same as where the shares traded as recently as February. Yet the board has capitulated.

Growth but at a Price
Rising content costs have crimped Sky's profit, even as revenue has grown steadily
Source: Bloomberg

What could thwart Murdoch? Sky closed on Friday below the offer price, suggesting some uncertainty about the situation. Politics is one possible obstacle. Murdoch had to withdraw his last attempt at buying out Sky in 2011 following the phone hacking scandal. Today, the U.K. has a different government and a new regulator.  Any attempt by Murdoch to expand his empire in Britain is still likely to raise concerns about media plurality even though Fox is shorn of its newspapers. That's before considering any storm about foreign bidders exploiting sterling's Brexit devaluation. 

Then there's Fox's own independent shareholders, who may not like the company doubling down on Europe. At the offer price, the deal would generate a return on investment of 6 percent in 2019, Gadfly estimates, shy of Sky's cost of capital. Fox investors need to believe Sky's woes really are temporary. Plus a debt-funded deal would push Fox's leverage to well over 3 times combined Ebitda.

Yes Fox is constrained. But it's still astonishing that Sky's independent directors haven't been more robust on price. It seems as if they're being led by pessimistic investors. It should be the other way around.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Chris Hughes in London at chughes89@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net