Photographer: Simon Dawson/Bloomberg

Sky Board Is Advised Not to Count on Disney Takeover

Updated on
  • No guarantee of bid for control if Fox offer blocked in U.K.
  • Some Sky shareholders are seeking a higher payout from Disney

Advisers to Sky Plc’s board are warning that if the government blocks 21st Century Fox Inc.’s takeover, the British satellite carrier won’t be able to count on a bid from Walt Disney Co., according to a person familiar with the matter.

Fox is expecting a U.K. government decision by June on its 11.7 billion-pound ($15.7 billion) offer for full control of Sky. If it’s rejected, Fox would retain its 39 percent stake in Sky, which Disney would acquire in a deal expected to close by the end of 2018. That transaction probably wouldn’t trigger a mandatory requirement for Disney to bid for the rest of Sky, bankers and lawyers have told Sky’s independent directors, according to the person.

The opinion matches that held by Disney, which wants to absorb Sky as part of its $57.4 billion purchase of Fox assets. Disney is also getting a movie and TV production house and a lineup of pay-TV channels in that transaction, and has assumed Fox will get full control of Sky before transferring it to Disney. If it doesn’t, Disney makes no promises about whether it will make its own bid for full control.

The situation leaves Sky board members and shareholders in a bind: Do they move forward with the 10.75-pounds-a-share offer on the table from Fox? Or do they hold out and hope that Disney will eventually come through with a higher bid?

Higher Price

If the same multiple that Disney is paying Fox assets were applied to Sky, it would equal 12.50 pounds a share, 16 percent above Fox’s current offer, according to Adam Tyrrell, head of event-driven research at Everbright Sun Hung Kai. But despite minority shareholders seeing value in Sky above the offer price, they may “blink in a stand-off with Fox,” he said in emailed comments.

Sky slipped 0.2 percent to 1,019 pence as of 12:45 p.m. in London.

The U.K. Takeover Panel plans to consult with Sky’s independent directors and could make a ruling soon on whether Disney would need to make a full bid for the satellite carrier if it gets only Fox’s partial stake.

The panel’s code normally forces a bid if a buyer amasses a stake greater than 30 percent, but a bid isn’t required if acquiring the holding isn’t a significant purpose of a transaction and only makes up a small part of a deal’s assets.

Disney argues the latter conditions hold with respect to Sky. The independent directors have been advised to agree with Disney’s view because the Sky stake is worth less than 25 percent of the assets being bought from Fox, said the person, who asked not to be identified as the discussions are private. At Tuesday’s close, Fox’s ownership of Sky was valued at about $9.2 billion, according to data compiled by Bloomberg.

If the Takeover Panel defied expectations and decided a Disney bid was mandatory, the company would probably have to buy out Sky’s investors for at least 10.75 pounds a share, given that’s the value assigned to Sky in a Disney-Fox presentation, according to Bruno Burki, an analyst at Square Global Markets.

“You could argue this is the price floor,” Burki said. “They are valuing this stake at 10.75” pounds.

For a look at Sky’s options in one chart, click here

Representatives for the Takeover Panel and Fox declined to comment, while Disney didn’t respond.

“The independent directors are aware of their duties and continue to take advice on this matter,” Sky said in a text message from a spokesman. “They will engage with the panel as any company would throughout the offer process.”

Some Sky shareholders are arguing the company should hold out for a better offer from Disney. Polygon Global Partners LLP, a hedge fund that owns a stake of less than 1 percent in Sky, says Disney ought to make a mandatory bid and should pay above 13 pounds a share. Polygon’s Reade Griffith said it can be reasonably assumed that buying the Sky stake is a significant purpose of the Fox merger, given Disney Chief Executive Officer Bob Iger told Bloomberg TV that Sky is a “crown jewel” in Fox’s assets.

Even without a mandatory bid from Disney, Sky investors may see a payout higher than the current bid, Burki said. If Fox’s takeover of Sky is cleared, Fox may be tempted to increase its offer to Sky’s minority shareholders to avert any potential investor rebellion, he said.

    Before it's here, it's on the Bloomberg Terminal.