Over the weekend it emerged that US telecoms giant AT&T is planning to acquire Time Warner in a deal valued at nearly $86bn, making it one of the largest mergers in history. And aside from the media buzz surrounding deal, analysts are speculating that this could be the beginning of a wave of M&A across the media sector as companies look to consolidate in the face of increasing competition and declining advertising revenues.
Time to make an offer?
ITV (LSE: ITV) and Sky (LSE: SKY) are no strangers to bid speculation, rumours have surrounded the companies for years now. So far competitors have had little appetite for these two UK multimedia giants. But there’s a reason to believe that this could be about to change.
Indeed, if the AT&T and Time Warner deal sets off a chain reaction throughout the sector, Sky and ITV may attract more attention than some international peers as, due to the falling value of the pound, US companies now have a chance to pick up these UK firms up with a 20% discount. Or to put it another way, any potential US acquirer can offer 20% more for these companies than they could a few months ago, increasing the likelihood any offer would be accepted.
What’s more, due to the concerns about the effect Brexit will have on these firms’ advertising income, shares in Sky and ITV are down 26% and 37% respectively year-to-date — yet another reason why these companies are now more attractive to predators than ever before.
As of yet, there has been no impact from Brexit on operating performance of Sky and ITV. For the three months to 30 September 2016, Sky reported like-for -like revenue growth of 5% and added 106,000 new customers during the quarter.
Meanwhile, for the six months to 30 June 2016 ITV reported total external revenue growth of 11% and adjusted profit before tax growth of 9%. City analysts expect Sky to report pre-tax profits of £1.2bn for the year ending 30 June 2017, up 5.8% year-on-year. ITV is expected to report a pre-tax profit of £818m for 2016, up 28% year-on-year.
Shares in Sky and ITV currently trade at a forward P/E of 14.2 and 10.3 respectively.
The bottom line
So, year-to-date ITV and Sky have continued to grow, but due to market jitters investors no longer appear to support the companies. From an outside acquirer’s perspective, this combination of growth and cheapness may be too hard to pass up.
When you include sterling’s declines, shares in Sky and ITV, appear even more attractive for US investors. Specifically, in dollar terms, shares in ITV have lost around 47% year-to-date, while shares in Sky have lost around 40%. To put it another way, Sky and ITV are on offer for US investors, and with such discounts available it’s likely only to be a question of time before an acquirer steps up to make an offer.
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Rupert Hargreaves owns shares of Sky. The Motley Fool UK has recommended ITV and Sky. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.