Market Insight

Fox launches new takeover bid for Sky valued at $14.5 billion

December 12, 2016  | Subscribers Only

Tim Westcott Tim Westcott Director, Research and Analysis, Programming

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US media group 21st Century Fox is preparing a final offer to acquire full control of Sky, the UK-based pay TV company. Sky and Fox issued a statement on Friday indicating that they had agreed a cash offer of £10.75 per share, valuing the deal at £11.7 billion ($14.5 billion). 

The companies now have until 6 January to finalise an agreement, after which the UK government will have 10 days to decide whether to refer it to regulators.

Fox, which already owns 39.1% of Sky, first approached the company with an offer on Tuesday last week (6 December). The offer price represents a 40% premium of the day's closing share price of Sky on the London Stock Exchange.

The new offer comes five years after News Corp dropped an earlier takeover bid for Sky (then BSkyB) in 2011. That bid, worth £7.8 billion, was approved by the European Commission and by the UK government on condition that the Sky News channel was moved into a separate company. However News Corp, which was facing a scandal over phone-hacking by journalists on its UK newspapers, decided to withdraw its offer in July 2011.

News Corp separated its newspapers from its film and TV activities, which it spun off into 21st Century Fox, in June 2013. Fox then sold its direct broadcast satellite division Sky Italia and its shares in Sky Deutschland to BSkyB, to create the 'new' Sky in November 2014.

If successful, the takeover will create a new media conglomerate spanning free-to-air broadcasting, pay TV channels and film and TV production. Combined fiscal 2016 revenues of the two companies were $44.5 billion. The most significant gain to the Fox financials will be Sky's direct subscription revenues, which amounted to $14.6 billion in fiscal 2016, compared to $11.2 billion affiliate revenues for Fox.

Our analysis

There is no real surprise about Fox launching a full takeover bid for Sky – just some uncertainty about when the company would judge the time was right. The Sky share price has fallen over the last year from a high of £11.26 on 29 December 2015 to £7.69 on 6 December this year, while the value of sterling has declined against the US dollar in the uncertainty following the UK's referendum vote to leave the European Union in June. Both could have influenced the decision, but what may be more crucial is a feeling that the level of opprobrium heaped on News Corp over phone hacking has diffused.

It is highly unlikely that the new bid will be blocked by the UK government, given that the previous deal was approved. The separation of the UK newspaper assets from Sky seems, it must be said, somewhat academic given that News Corp and Fox share a common major shareholder. More significant from a media plurality point of view is possibly the continuing decline of daily newspaper readership and the rise of websites and social media as an information source.

Sky is now the largest TV company in the UK by revenue, but faces competition in every part of the market. BT has emerged as a competitor in the sports pay TV market, while consumers have the alternative of streaming services from Netflix and Amazon. Free-to-air broadcasters ITV and Channel 4 are ahead of Sky in the TV advertising market, while the BBC's continuing central place in UK news provision and the free-to-air market also make it hard to see a case that Sky's position would be significantly enhanced by being under the full ownership of 21st Century Fox. Despite not owning a majority of the shares, Fox already provides the management and strategic direction of the company, as News Corp did before. Likewise, it is doubtful whether Sky would enjoy increased access to Fox film and TV output and its branded pay channels as a result of the change in shareholding. Sky already has first window pay TV rights to Fox theatrical films.

Shareholders in 21st Century Fox may be content with the deal solely on the grounds that full ownership of Sky, which generated operating profit of £1.9 billion in the last financial year, will add value to the business. The deal will also boost the revenues generated by Fox outside the US at a time when the Fox network is under primetime ratings pressure and the domestic pay TV market is contracting as consumers cut the cord. The massive investment by Sky in sports rights (especially in the UK and Germany) may, however, come under greater shareholder scrutiny.

The upside of the deal will also hinge on what Sky would bring to Fox rather than the other way round. This could include Sky's expertise in launching over-the-top services – in particular Now TV in the UK – and exploiting further its investments in playout facilities. Sky has also made investments in virtual reality and ad tech which could all feed into the wider Fox business. Co-productions between the Sky channels and the Fox studios and joint ventures into new markets such as Asia (where Fox is already a major player with Star) could also result from the closer association. 

Research by Market
Media & Advertising
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