Last week, Rupert Murdoch’s US based Newscorp announced a proposal to purchase the 61% holding in BSkyB (LON:BSY) which they do not own for £7 per share, valuing the company at around £12.6 billion. The "proposal" was swiftly rejected and Sky's independent directors have stated that any offer would need to north of the £8 mark in order to be considered.
Having seen his initial advances rebuffed, it is our view that Murdoch will eventually return with a higher offer. Why? Well, if recent results are anything to go by Sky is an efficiently managed cash generator. So far this financial year, the company has been able to get into more households and implement price rises effectively, therefore boosting revenues, earnings per share and free cash flow. Such performance, during a downturn, can only be called robust and underscores the defensive or economically resilient nature of "in-home" entertainment.
Sky brings in a huge amount of cash from its subscriptions and with his current level of ownership of Sky at 39%, Rupert Murdoch is well aware of this. It is likely that Murdoch sees Sky's growth trajectory as more predictable and certain than many other parts of his empire and hence we believe that he will not be denied total control.
However it is not all plain sailing and regulation remains a key issue for Sky shareholders.... on two different fronts.
Whilst the European authorities mandated that Sky should not win total rights to the FA Premiership (upon which their success has been based),and more recently the Office of Fair Trading has ruled that Sky re-sell its sports at wholesale prices to its competitors rather than at a premium. Such a ruling would clearly reduce profits and it is no surprise that Sky is appealing the decision.
Secondly, regulation could scupper the Newscorp takeover. Approval from European regulators could take some time is not guaranteed, explaining why shares have gravitated around the £7 mark. Sky's independent directors may have set and published an £8 target for any deal, but the market evidently remains wary of Newscorp's willingness to pay such an amount as well as possible regulatory hurdles which lie in wait.
Murdoch's interest may have provided a short term boost for the share price however Sky’s growth potential was apparent long before the proposal.
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