Sky shares are -1% this morning, despite 39% owner Twenty-First Century Fox (17% owned by Rupert Murdoch) upping its offer for the remining 61% stake by 30%. Why?

Because the 1400p/share offer represents a 6.3% discount to where the shares closed yesterday (1500p), having doubled since Fox’s first offer in December 2016. This rise was fuelled by hopes of a bidding war, inspired by Disney bidding for Fox Entertainment assets (incl. all of Sky) a year later (Dec 2017), obliging it to honour Fox’s offer for the rest of Sky, and Comcast throwing in a rival 1250p offer for Sky in Feb 2018 as part of a bid for those same Fox assets.

Hopes rose further after Disney upped its bid for Fox’s assets by 35% last month, encouraging Sky investors to ask regulators to push Disney to up its offer for Sky proportionally. It already needs to up its bid if it wants to trump Comcast. This hasn’t happened yet but Murdoch’s 1400p bid today, which Disney would surely have to honour, may well have forced the issue. Note that a 35% improvement on Fox’s original 1075p bid for Sky, implies 1450p/share, just 2.4% below where the shares trade.

Murdoch’s latest move looks like he’s trying to force both Disney and Comcast to improve their bids for Sky. Because this maximises the value of his Sky stake whether it is bought on its own, or as part of Fox Entertainment assets. As it stands, Murdoch looks confident that both Disney and Comcast want them, badly enough and prepared to pay more.

Are we to expect a 35% higher bid from Disney at 1450p? Perhaps Murdoch’s move today is a compromise offer, obliging it to match his 1400p/30% better offer, saving it from improving by the full 35%? Might we get a 17.5% advance to 1469p from Comcast, keeping the bidding war alive? The shares above 1400p imply confidence that this bidding war still has legs.

The risk of course is that neither Disney nor Comcast follows through, both deciding that valuations on Sky have got too stretched. This would force Murdoch/Fox to pay much more for full control of Sky than originally intended, even if the business has positively evolved over the last 18 months, media assets more in demand amid.

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Head of Research at Accendo Markets
11th July 2018
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