Sky Low-Balled

How Not to Run a Bid Defense

Fox's low-ball offer best serves short-termist investors.

British assets are being snapped up by foreign buyers and the devalued pound makes that likely to continue in 2017. Sky Plc's readiness to approve a mean approach from Twenty-First Century Fox Inc. is a lesson to Brexit bid targets in how not to run a defense.

A series of cheeky offers from Fox was weighed by deputy chairman Martin Gilbert and a committee of independent directors. The best that can be said for them backing Fox's 1,075 pence a share bid is that it gives investors an option to sell at a level not seen since February. The offer is well below many analyst targets for Sky, but 43 percent above where the stock traded earlier this month.

Turning Back Time

Fox's 1,075 pence offer for Sky is at a level last seen in February but below the shares' high for 2015

Source: Bloomberg

Doubtless many Sky shareholders were pushing for this. Could that have something to do with it being December and the bid providing a nice fillip to their 2016 performance figures? If so, it's yet another triumph for investor short-termism.

At least all Sky shareholders now have some choices. They can sell at 989 pence today if they're worried regulators will block Fox. They can wait to bag the offer price if the bid gets approved next year. Or they can vote against the deal if they think the shares are worth more. 

Well done Gilbert? Not so fast. The overriding priority here seems to have been to secure a firm deal for shareholders, with the terms of secondary importance. That may be pragmatic, but it sets a bad precedent for bid defenses. Ideally, a board would take a more principled approach. That means forming a view on the fair take-out price and vigorously resisting anything less. Is 1,075 pence a fair take-out price for Sky? Executives didn't give that impression at a bullish investor day in October. Things could get interesting if an activist tests the price by commissioning a fairness opinion from an unconnected bank or audit firm.

The Sky board may well have extracted the best takeover offer available today -- if there has to be a deal. Fox's existing 39 percent stake in Sky is a block to a counter-bid. Fox can only afford so much because its debt capacity is limited and shareholders probably wouldn't stump up fresh equity. There's no way Fox could have gone hostile given the complicated politics of the situation. So for any transaction to be possible, it had to be from Fox, it had to be cheap and it had to be recommended by Gilbert et al.

Everyone knew Sky was going to be bought out by Fox one day. But boards of companies with more normal share registers shouldn't be so amenable to facilitating a deal whenever a bidder comes knocking. It's not their job to recommend any sub-par offer just to give short-termist shareholders a boost. If investors get upset that a board says no on principle, they can always boot it out at the next AGM.

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

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