After years of will they/won’t they speculation, on Friday last week 21st Century Fox revealed that it had finally made an offer to acquire the 61% of Sky plc (LSE: SKY) the group doesn’t already own.
Fox is offering £10.75 per share, which is 40% more than Sky’s Thursday closing price before the bid was announced. The offer values Sky at £18.5bn, less the value of any dividends subsequently paid by the company.
Fox and Sky have tried to merge in the past, but the last attempt was thwarted by the 2011 hacking scandal after it emerged that journalists at the News of the World had hacked the phone of the murdered teenager Milly Dowler. The scandal left a black mark on the whole Murdoch empire.
This time around there’s a higher chance the merger will go ahead. Fox is under pressure to increase revenues amid a hostile media environment. Where cable providers such as Fox used to reign supreme, it’s now the content producers that have the edge as streaming sites such as Netflix and Amazon Prime take over the traditional pay-TV market.
Fox does produce some of its own content, but the brand needs size and diversification to take on its peers effectively. Sky offers just that.
Opposition to the deal
The biggest opposition to the deal seems to be stemming from Sky’s existing shareholders — those who own the 61% of the business not already owned by Fox.
It looks as if the consensus among these investors is Rupert Murdoch’s Fox is making an opportunistic low-ball bid for Sky after recent declines in the broadcaster’s share price. Indeed, between mid-2015 and Thursday evening before the bid was announced, shares in Sky had slumped by more than a third as sentiment towards the company deteriorated. This decline, coupled with a weaker pound following the Brexit vote, has slashed billions off Sky’s price tag. So it’s clear that the bid is opportunistic, but it’s unlikely Fox will come back with a higher offer any time soon. The group’s debt is already at worrying levels and as Murdoch already controls 39% of Sky, he only needs a small percentage of independent shareholders to vote in favour for the deal to go ahead.
Aside from existing shareholders being concerned about the price offered, the other significant headwind to this deal comes from regulators. The secretary of state has 10 working days to make an initial decision on whether to intervene after formal notification of the merger to the competition authorities. However, as of yet the government hasn’t yet received formal notification of the proposed takeover. Therefore, at this point, it’s hard to gauge the government’s view on the offer.
Foolish summary
All in all, Fox’s latest bid for Sky has mixed potential outcomes for shareholders. This could be just the beginning of a long battle between regulators, Sky shareholders and Fox as the three parties come up with the best deal to appease all stakeholders.
For Sky’s existing shareholders this means a period of uncertainty is likely, but as the underlying business continues to perform well, for long-term investors, this uncertainty is unlikely to be a huge concern.
