Fox’s chances of securing Sky depend on the football result

Observer |

The threat of greater regulatory scrutiny and a dip in Sky’s share price weighed on Rupert Murdoch’s ambitions to take full control of the satellite broadcaster last week. But investors are looking ahead to whether the upcoming Premier League TV rights auction might result in Fox having to sweeten its £11.7bn offer.

Last week, culture secretary Karen Bradley again postponed calling in the Competition and Markets Authority (CMA) to scrutinise the deal, asking media regulator Ofcom to further examine the Murdochs and their adherence to broadcasting standards.

Bradley has said she intends to call in the competition regulator to scrutinise media plurality issues (as the deal would see the Murdochs controlling UK assets ranging from Sky News to the Sun and Times newspapers), but has not made up her mind about whether to ask it to also look at broadcasting standards issues.

Ofcom said it had found no grounds for asking the CMA to look at issues including the sexual harassment scandal at Fox News, but there are many opponents of the deal – including Ed Miliband, Vince Cable and campaign group Avaaz – and some have threatened legal action if the government does not launch a full investigation.

Alice Enders of Enders Analysis says Fox will not be overly concerned at the latest extension. Bradley is widely expected to leave the decision until after parliament returns from summer recess on 5 September.

“Fox will … feel the CMA will give a fairer, depoliticised hearing,” she said. “For Bradley it is about additional legal cover. She is taking very seriously the threat of a judicial review. She is being risk-averse, and the political environment [with no Tory majority] is unfavourable. She is being cautious.”

Nevertheless, Sky’s share price has sunk to its lowest since December, when news broke of Murdoch’s bid to buy the remaining 61% of the company, reflecting investors’ fear that the deal may not happen.

Two analysts examining Sky’s break price – the level its shares would trade at if there was no deal – against its current price and Murdoch’s £10.75 offer reckon that investor sentiment estimates completion as about 55% likely.

“The biggest risk was Ofcom’s test of whether the Murdochs were fit and proper owners of Sky’s licence, and they passed that,” said one Sky shareholder. “The stock reacted very positively when that decision came through … I don’t think Sky’s share price is a true reflection of the likelihood of the deal going ahead or not. Most people would say it is 75% to 85% likely to complete, but no one is willing to price that in.”

Investors will be also be watching the outcome of the Premier League TV rights auction later this year, with analysts estimating that the broadcaster may have to stump up 40% to 45% more than it currently pays. They have factored in Sky adding £600m a year to its cost base. “The outcome of the rights auction could materially influence the [profits] Sky makes,” said one analyst. “The City has baked into their forecasts a £600m increase; if you ended up with a much better deal than that, it would have to drive a fundamental reappraisal of Fox’s bid price.”

Former top Sky executive Mike Darcey thinks that, after a string of bidding battles, Sky and BT may this time reach an equilibrium in how the seven Premier League TV rights packages are divided. He believes that unless a new rival makes an unlikely entrance and ratchets up the bidding – someone such as Amazon, which recently poached the UK rights to ATP World Tour tennis from Sky – “natural” inflation over the past three years could see the price rise by no more than 15%.

The analyst says that, in such a case, Sky’s extra payments would rise just £200m a year – not £600m – and analysts would expect the extra £400m to become profit instead.

Financial models, he said, look at such figures over 10-year spans, which would imply profits of £4bn needing to be factored into Sky’s business. That would have a huge impact on how Murdoch’s offer is viewed.

He went on: “If the City is way off on inflation – if it comes in lower, not higher – either Fox will be getting the deal of the century or [Sky] investors will be saying: ‘hang on – we just got massively undersold’.”

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