Analysts at investment bank Liberum have advised investors to ‘Hold’ their shares in Sky in the wake of the UK Government effectively giving the green light for both the 21st Century Fox / Disney and Comcast bids for the pay-TV operator to proceed.
For Liberum, the key question is how 21st C Fox / Disney react to Comcast’s 1250p bid. “We think there will be a counter-bid but it is unlikely to be above the 1375p [€15.70] level plus a dividend adjustment. As a result, we reiterate our Hold,” they say.
Liberum notes that the Culture Secretary, Matt Hancock announced that 21st Century Fox’s bid for the 61 per cent of Sky it does not own would be allowed to proceed on the condition that Sky News was divested. “As Disney, which has agreed to buy Sky from 21st Century Fox, would be allowed to purchase Sky News, this has little effective impact,” says the bank. Comcast, which has offered 1250p for Sky, is also allowed to bid.
“The obvious key question is what Disney does next,” say the analysts. “While Fox has stated that it remains committed to its cash offer on Sky but is considering its options (not surprising given its cash offer of 1075p now looks out of date). In reality, this is likely to be about what Disney is willing to pay for Sky as Disney will be the buyer of the Fox assets,” they suggest.
“We think that Fox / Disney will counterbid. Disney has to be mindful of becoming involved in a bidding war with Comcast for the asset. However, ownership of Sky would seem central if Disney wanted to expand its plans to build a direct to consumer network in North America into Europe as it would give Disney access to the #1 Pay-TV operator in the UK, Germany and Italy,” they note.
“The question now is whether Fox / Disney makes a knock-out bid to discourage any further Comcast offer and what it thinks this level is, without breaking the bank. We think a credible counter-bid would be at 1375p (plus the dividend payment), offering a £1.25 premium to the stated Comcast bid (i.e. 10% premium). This implies a total acquisition price of c. >£30bn once the net debt is included (based on c. £7.4bn 1H net debt adjusted for the sale of Sky’s stake in Sky Bet) and also assuming the payment of the dividend,” they advise.
“Given we think a 1375p bid is probably the limit, and the shares are already above 1350p, there is little implied upside and so we keep the HOLD, with our target price of 1400p based on this 1375p limit plus an assumption of a final dividend guaranteed by the bidder,” they conclude.