Sky Upgraded After Comcast Bid

Morningstar equity analysts have raised their fair value for the FTSE 100 broadcaster, but think that a bidding war between Comcast and 21st Century Fox is unlikely

Allan C. Nichols 28 February, 2018 | 9:50AM
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Sky is the Subject of a Takeover Battle

US cable giant Comcast (CMCSA) yesterday offered £12.50 a share to buy FTSE 100 broadcaster Sky (SKY), a 16% premium to 21st Century Fox’s (FOXA) agreed offer. Sky's shares soared 20% on the prospect of a bidding war between Comcast and Fox for Sky. Morningstar equity analysts believe the likelihood of some kind of an acquisition has increased and we are increasing our Sky fair value estimate to £12.40 from £10.50 which now includes a takeover premium. The shares are currently trading around £13.30 after Comcast's bid.

Comcast’s proposal is not a formal offer, but allows Comcast to discuss the offer with regulators and financiers. With this proposal, we believe Fox will need to increase its offer. However, with Fox already owning 39% of Sky it just needs to attract an additional 11% of the vote and has already traveld through most of the regulatory process, while Comcast needs to attract 50% plus one vote of all shares, or roughly 82% of shares Fox doesn’t own, and is just starting the regulatory process. Thus, while we think a higher bid from Fox may be required, the two sides won’t necessarily get into a bidding war. With the stock trading well above Comcast’s offer, we would suggest shareholders consider selling their stock rather than betting on a much higher price.

Fox Bid 'Not in the Public Interest'

While Sky agreed to accept Fox's offer for the 61% of Sky it doesn't already own, the Competition and Markets Authority has preliminarily stated it believes the deal is not in the public interest and will send its final opinion to the UK Secretary of State for Digital, Culture, Media, and Sport by May 1, 2018. While we don’t see any difference in Fox’s influence whether it owns 39% or 100%, that is not the CMA’s opinion. 

Our bull-case fair value estimate is £15.50 a share. In this scenario, we expect a bidding war to break out between Comcast and either Fox or Disney and push the offers much higher than Comcast’s £12.50 proposal. Also, helping to drive such a price would be Sky having greater success adding new subscribers in television, phone, and broadband than we expect in our base case.

In our bear-case scenario, our fair value estimate is 760p a share. In this scenario, the weak UK economy, which is likely exacerbated by Brexit, hits Sky's subscriber and average revenue per user (ARPU) growth, pushing down growth rates for both. Additionally, Virgin Media, BT, and others have more success in selling television and broadband services, taking market share away from Sky. In this scenario, margins decline as the benefits of scale fail to materialise. 

 

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Comcast Corp Class A36.90 USD-1.10Rating

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Allan C. Nichols  Allan C. Nichols

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