Murdoch Pounces on Sky as Lower Pound Makes Takeover Cheaperby
Approached two days ago, Sky’s independent directors back deal
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Rupert Murdoch has long coveted full control of Sky Plc. It’s always been a question of when -- not if.
A pair of shock elections gave him his chance. The U.K.’s June vote to leave the European Union sent the pound plunging and made Isleworth, England-based Sky a far cheaper target. That bolstered Murdoch’s interest, according to people with knowledge of the matter. Then U.S. voters handed the presidency to Donald Trump, whose promises of a friendlier business climate have lifted the stock market.
Murdoch pounced, with his 21st Century Fox Inc. announcing a preliminary agreement Friday to pay $14.2 billion for the 61 percent of Sky it doesn’t already own. While Fox approached the U.K. broadcaster only two days ago, according to a statement, Murdoch had been working on a bid for months, said the people, who asked not to be named discussing internal deliberations.
“We always thought it was most likely Fox would buy it,” said Brett Harriss, an analyst at Gabelli & Co., which owns stock in both companies. “Strategically this isn’t about synergies, it’s about clearing up a minority stake.”
Fox fell 1.5 percent to $28.21 on Friday in New York and is up 3.9 percent this year. Sky soared 27 percent to 10 pounds in London. Murdoch’s company is offering 10.75 pounds a share for the Sky stock it doesn’t already own. Under U.K takeover rules, Fox has until Jan. 6 to make its bid formal.
Murdoch and his sons, Chief Executive Officer James and Co-Executive Chairman Lachlan, have consistently made clear that their company’s 39 percent stake in Sky wouldn’t remain the status quo. The agreement solves a few conundrums for New York-based Fox, a film and TV producer whose interests include the Fox News, FX and Nat Geo cable TV networks.
For starters, Fox has been under pressure from shareholders to explain how it plans to spend its money. The company said in August it was slowing share repurchases. That sent the stock down more than 5 percent. Media investors in the U.S. have also worried about competition from newer players like Netflix Inc. and Amazon.com Inc. and their effect on the
traditional TV universe where Fox earns almost 90 percent of its profit.
Use of Capital
The deal for Sky is not only a compelling use of capital. It also helps diversify the company’s revenue away from the U.S. advertising market toward a growing and more stable source of income, with 21.8 million customers across Europe, according to analysts. Sky will add more than $15 billion in annual sales to Fox, where fiscal 2016 revenue totaled $27.3 billion.
“We view the deal as positive both from an accretion perspective but more importantly from the perspective of diversification of revenue beyond U.S. cable advertising,” Ben Mogil, analyst at Stifel Nicolaus & Co. wrote in a note. He recommends buying Fox shares.
Owning content and distribution, along with Sky’s advanced TV services, could help Fox “be more dynamic as they create new products,” Harriss said.
The agreement comes five years after a phone-hacking scandal at Murdoch’s U.K. newspaper operation derailed his first bid for Sky. Analysts are hopeful the deal will get regulatory clearance. The 2010 offer received EU approval and the U.K. regulator Ofcom chose not to challenge the deal.
Financially the purchase is attractive for Fox shareholders, John Janedis, analyst at Jefferies LLC, wrote in a report. Prior to the announcement, Sky shares had fallen about 30 percent this year as investors grew concerned about the company’s ability to compete against online threats like Netflix Inc. and rising sports programming costs.
With the pound near 30-year lows against the U.S. dollar, ownership of Sky looks a lot less risky, Janedis said.
If it goes through, the Sky purchase will close out a tumultuous period for the Murdochs.
The hacking scandal five years ago, in addition to scuttling the bid for Sky, led James Murdoch to step down from top roles at the satellite-TV company and News Corp. In 2013, Rupert Murdoch broke up the family empire into separate entertainment and publishing assets -- splitting the Fox movie and TV business from News Corp. and newspapers including The Wall Street Journal and the New York Post.
Changing of Guard
Last year, Murdoch installed his sons as leaders of Fox. They’ve put in place new leadership at the highly profitable Fox News, where a harassment scandal led them to oust longtime chief Roger Ailes, and the movie division.
Rebekah Brooks, cleared of all charges relating to the hacking, returned to work at News Corp. and this year James Murdoch reclaimed the chairmanship of Sky. After an aborted bid for Time Warner Inc., in 2014, Fox punted its stakes in Sky Italia and Sky Deutschland to Sky Plc. Fox will own them all outright once the latest deal goes through.
At 11.7 times 2017 Ebitda, the valuation of Sky is the highest in the European pay TV universe, so Fox is still paying a full price, according to Paul Sweeney, a Bloomberg Intelligence analyst. And while there’s risk from more debt and potential pressure on Fox’s credit rating, most investors were expecting a deal, he said.
Fox had $4.68 billion in cash and equivalents on hand as of Sept. 30, along with $19 billion in long-term debt, according to filings. S&P Ratings said Friday it might lower Fox’s BBB+ credit rating.
“Fox has wanted to own this asset for a long time,” Sweeney said. “The company was simply waiting for a time when it would be well-received following the phone hacking scandal.”
Centerview Partners Holdings and Goldman Sachs Group Inc. have been appointed as advisers to Fox along with Deutsche Bank AG.