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A report from Macquarie investment bank has suggested that the time was now right for a deal which would see 21st Century Fox buy the 61 per cent of Sky it does not already control.
“That moment has come, with Sky shares down 32 per cent [this year to date] in US$ terms,” Macquarie’s Guy Peddy stated. The firm states Sky’s enterprise value at some £20.7 billion (€24.3bn).
Macquarie suggests that the UK media scene has changed significantly since the 2011 attempt to put Sky wholly into a Murdoch stable. Not only because of a change of Prime Minister (David Cameron was seen as overly sympathetic to Rupert Murdoch) but because 21st Century Fox is a wholly different entity from News Corp.
Macquarie believes as Cameron has gone, so has a political complication. Moreover, Sky, profitable as it is, remains a broadcasting minnow in audience terms compared to the BBC (and even ITV). Additionally, the UK’s broadcasting scene is now extremely diversified and the entry over the past year or two of Netflix and Amazon only further dilutes Sky’s position and increases consumer choice.
Macquarie’s view is that Fox would benefit from Sky’s growing European position, and a Sky/Fox combination would see further scale achieved in content production and distribution.
“European pay TV markets are more concentrated, more vertically integrated, less penetrated into households, more flexible in terms of network packages offered, and generally cheaper than US pay TV bundles,” says the bank.
Peddy argues that “TV can buy TV”, although he recognises that Murdoch’s name (both Rupert and James) are still a political hot potato in the UK, and there is little certainty that a 21st Century Fox bid would win the support of new Culture Media and Sport Secretary Karen Bradley or even Prime Minister Theresa May in any take-over activity.
Nevertheless, Macquarie says the financials are compelling, even with an all-cash bid for Sky at a premium of 20 per cent over its current price, Sky remains good value. “In our view,” the bank’s report concluded, “even at this level, Sky’s share price would fail to recognise the superior and more diversified UK revenue stream, international growth and the lower sports rights inflation risks. This would make a transaction even more compelling for Fox.”
Macquarie’s reiterated its ‘outperform’ advice as regards Sky shares with a target price of 1400p. This would represent a potential 60 per cent upside from the price at the end of August.