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What can investors learn about the Sky takeover saga?

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I read a comment Wednesday on how nice it is to own something that two very wealthy bidders want to get their hands on.

We’re talking about Sky (LSE: SKY), and the long-running takeover saga has taken a further step after Rupert Murdoch’s 21st Century Fox raised its offer to value the company at £24.5bn. The bid trumps Comcast’s previous valuation of £22bn, which itself eclipsed Mr Murdoch’s original offer.

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Ofcom and the Competition Markets Authority have been investigating the affair since the original bid, fearful that it could leave Rupert Murdoch with too much control over the UK’s media. But with an agreement for him to sell Sky News (probably to Disney), objections are almost certain to be lifted — and approval for the latest takeover offer is expected to be given very soon.

If it goes ahead, Fox will fork out £14.7bn for the 61% of Sky that it does not already own, and that looks like good news for the folk who own those shares. But the effective valuation of £14 per share is still slightly below the current market price of £15.12, so some investors at least will be hoping for a further escalation of the battle.

Even as it stands, Sky shareholders have seen the value of their investment climb by 72% over the past two years, while the FTSE 100 has gained just 13%. Clearly a terrific result, but is there a valid strategy here for buying in the hope of a takeover?

Takeover strategy

Well, if there is, it’s surely a risky one. It’s not that long ago that Vodafone was seen as a tasty takeover target as rumours abounded, and global consolidation in the telecoms business was seen as inevitable by great swathes of investment professionals.

But nothing has yet come to pass, and Vodafone shares have suffered over the past five years — from a high in February 2014, we’ve seen a 40% fall to today’s 25p level.

That reminds me of a firm rule I have — I would never buy a stock in the hope of a takeover unless I’d buy it at the same price on its own merits alone. In the case of Vodafone, I saw the shares as overvalued, so I kept away.

That’s unlike Imperial Brands, which fellow Fool writer Ian Pierce has highlighted as a possible FTSE 100 takeover target. Imperial Brands shares have been falling since mid-2016, and we’re now looking at a forward P/E of under 11 with a decently covered forecast dividend yield of 6.6%. Now that looks like an attractive valuation to me, and it’s a stock I’d seriously consider buying in its own right — and if a takeover bid should provide an extra boost, that would be a bonus.

More to come?

But back to Sky. In January I rated it as an attractive buy candidate, based on its fundamental valuation and its position as a leader in its market. Not a screamingly cheap investment, but in the words of Warren Buffett, I saw a great company at a fair price.

At the current share price we’re looking at a forward P/E of above 22, while dividends look set to yield 2.5%. That’s a significantly higher valuation today, and it would put me off now. But if the bidding is not yet over, there could still be more twists…

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Walt Disney. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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