Deals

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.

Sky Plc investors are clamoring for Rupert Murdoch to offer a better price for their shares in the British broadcaster. They are in a weak position -- but can still make life difficult for the media mogul.

Rightly, shareholders are balking at the meanness of the 1,075 pence offer Murdoch's 21st Century Fox Inc. made last week for the 61 percent of Sky it doesn't already own. Standard Life, Royal London and Jupiter Asset Management have already spoken out. Behind them are others who haven't put their head above the parapet.

Dominant Shareholder
Murdoch's 21st Century Fox owns 39% of the British broadcaster
Source: Bloomberg

They aren't getting any help from Sky's independent directors, the people whose job it is to protect non-Murdoch shareholders' interests. The board has accepted the price.

Still Short
Sky shares haven't traded above Fox's offer price
Source: Bloomberg
Intraday times are displayed in ET.

They aren't getting any help from the wider stock market either. The shares closed below the offer price on Friday and dipped again on Monday amid doubt that the deal will make it all the way to completion. Sky is splashing out on new services -- including a U.K. mobile business -- while the cost of content is rising, especially for sport. The market is pessimistic that Sky can turn that cash burn into long-term cash flow.

Sky's faithful shareholders are on the right side of the argument. The broadcaster is in a trough, but it has a track record of making investments pay. True, the competitive environment may have become more intense since BT Group Plc started to challenge Sky's position in premium sports. But analysts who believe the satellite broadcaster can deliver reckon the stock could be worth substantially more than Fox's offer: Citigroup analysts think Sky is worth 1,350 pence a share. UBS's price target is 1,310 pence.

Sky Subscription
Broadcaster's shares are still trading below Fox's offer price - and some analysts' price targets
Source: Bloomberg

What can investors do? The uncertain politics of the situation may benefit the refuseniks. Fox needs to satisfy the communications regulator that it wouldn't reduce media plurality in the U.K. by concentrating more ownership in Murdoch's hands. When he last bid for Sky in 2010, remedies were devised to get around this involving Sky carving out its news operation. Few observers see any legal grounds for blocking a transaction.

Still, there are many voices opposed to the deal, and shareholders could make life difficult for Murdoch if they joined the anti lobby. The novelty of a coalition comprising prominent U.K. money managers as well as Murdoch's longstanding political opponents would make it much harder for regulators to wave the purchase through -- especially in the post-Brexit political environment.

It's possible, too, that an activist shareholder could squeeze out more from Fox. There are precedents. Elliott Advisors extracted a small increase in Anheuser-Busch InBev NV's offer for SABMiller Plc after it swooped onto the register demanding more. In that situation, InBev had the support of 40 percent of the share register and likewise was only trying to win over the other 60 percent.

Sky's board may have thrown in the towel. That doesn't have to apply to everyone else.

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

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net