News Corp Bid for BSkyB Seems Fair

The 700p/share bid has been rejected by the UK broadcaster but we think a higher bid is quite likely

Michael Corty, CFA 15 June, 2010 | 4:42PM
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News Corporation's bid of 700p or ($41.38 per ADR) for the 61% of British Sky Broadcasting it doesn't already own was rejected as too low. BSkyB's independent directors said they would be inclined to accept an offer above 800p per share, and the companies agreed to work together to start the regulatory approval process despite not settling on a price.

From the perspective of a BSkyB shareholder, we think the existing offer is fair, as it exceeds our fair value estimate, but we think a higher offer is quite possible, given the strategic importance of the deal to News Corp. We're not too surprised that News Corp. wants the remainder of BSkyB, as it is fond of the business and has been evaluating how to deploy its $8 billion cash balance, which puts its net debt/EBITDA ratio around 1. The offer price is 9% higher than our fair value estimate for BSkyB, so we think buying back its own shares, which we believe are slightly undervalued, would be a better use of capital. We're maintaining our fair value estimate for News Corp., as the likely premium paid for BSkyB is immaterial to our overall valuation of the firm.

Michael Corty, CFA is an equity analyst with Morningstar. Allan Nichols contributed to this analyst note.

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Michael Corty, CFA  Michael Corty, CFA, is an equity analyst with Morningstar.

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