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Why Sky plc shareholders should resist 21st Century Fox’s attack

So Rupert Murdoch’s 21st Century Fox has agreed a price for a takeover deal with Sky plc (LSE: SKY).

An earlier attempt by Murdoch to take control of the whole of Sky was derailed after News of the World hackers were found to have tapped into the phones of celebrities and of murdered teenager Milly Dowler. Now he’s trying again.

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The new deal is, apparently, worth £10.75 per Sky share in cash, and it ‘s being lauded by the bosses of both Fox and Sky — though that’s not really any surprise, with Rupert’s son James being the chief executive of Fox and the chairman of Sky.

Should the takeover go ahead? In my view, for the sake of Sky shareholders, it shouldn’t.

Too cheap

Several major investors in Sky, including Jupiter Asset Management, have expressed doubt that it’s the best deal that could have been reached, questioning the true independence of the firms’ independent directors. Thomas Moore of Standard Life Investments went so far to say that James Murdoch’s interest in both companies means it can’t really be an “arms-length deal“.

The Sky share price offers a premium to its levels of last week before we knew of the possibility of an offer, but it’s actually dropped back a little today to 974p. That’s nearly 10% below the offer price, which reflects the serious levels of uncertainty surrounding it.

Many consider the offer to be a lowball attempt to snap up Sky on the cheap, after its shares have had a very poor year. The mooted £10.75 is actually significantly behind the £11.75 levels that Sky shares were fetching at the end of December 2015, and it places a low valuation on a company that in my view has a strong long-term future.

Even at today’s hiked price, Sky shares are still on a forward P/E multiple of only a little over 17.

Sky has also been steadily lifting its well-covered dividends for years. In fact, the year to June 2016 was Sky’s 12th consecutive year of dividend growth, and the firm told us that “it remains our policy to maintain a progressive dividend policy“. At today’s elevated price, we’re looking at a forecast yield of 3.6% for the year to June 2017 — and even at the offer price, we’d still see 3.2%, pretty much bang on the FTSE 100 average.

Not a sell

On valuations like that, I really don’t see the Fox offer as being remotely attractive — in fact, even at £10.75 apiece, I’d be thinking of Sky shares as a possible long-term buy, not a quick sell.

Of course, this doesn’t even touch on regulatory concerns, and watchdogs (who, apparently, haven’t yet been formally notified of the plan) will be scrutinising the matter on concerns that the Murdoch family would gain too much influence over UK media.

Whatever happens, it will surely be some time yet before we learn of the final outcome of all this.

There’s a nice bit of profit to be had there for today’s buyers if the takeover should prove successful. But that’s a big if, and I see the deal as a vulture attack on a company whose shares are temporarily down. And one which is very much in the interests of 21st Century Fox and of the Murdochs, and not of ordinary Sky shareholders.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.