21st Century Fox Makes Offer to Buy Full Control of Sky

Rupert Murdoch Getty H 2016
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The offer values the European pay TV giant at $23.2 billion.

21st Century Fox has offered to buy full control of Sky in a deal that values the European pay TV giant at roughly $23.2 billion, the companies disclosed on Friday. 

Fox currently owns a 39.1 percent stake in the pay TV company that operates in the U.K., Ireland, Germany, Austria and Italy. Fox, in a preliminary agreement offered $13.52 (£10.75) per share in cash, or $14.15 billion for the 61 percent it doesn't own yet. Under U.K. law, the companies have 28 days to finalize a deal or decide not to do so.

The possible combination would bring together content and distribution assets – as Sky operates pay TV platforms in its five core markets and has also invested in streaming video platforms in international markets – and comes after telecom giant AT&T recently agreed to buy entertainment powerhouse Time Warner for $85.4 billion in a deal that would also bring together content and distribution. Comcast has been the main proponent of combining the two parts of the business since several years ago acquiring NBCUniversal.

One industry watcher noted that Sky has a reputation for direct-to-consumer acumen and expertise in combining entertainment and technology, with a deal seen as injecting that into Fox's culture more. In that context, Fox CEO James Murdoch at the UBS Global Media and Communications Conference in New York this week talked about authenticated apps, such as Fox Sports Go and FXNow, saying: "We're very focused on creating more capability around that user experience in a similar way that we did with the Skys, with Sky Go, where over half of Sky's customers actively use the over-the-top streaming product to consume the video, and that's sports, movies, TV series etc ... The streaming business is still one that we're leaning into very hard, because we think it's a better business than the passive linear queue of products that we've put down the classic channel model."

For Fox, the Sky acquisition would also diversify its revenue to give it more international revenue amid a mature U.S. market and more subscription revenue. And it would be the another asset for which Fox clarifies ownership after Fox, or News Corp., the company that a few years ago split into Fox and News Corp, in recent years buying control of or selling various businesses that it didn't fully own.

"Sky has received an approach from 21st Century Fox," Sky said Friday. "After a period of negotiation, the independent directors of Sky and 21st Century Fox have reached agreement on an offer price of £10.75 per share in cash, less the value of any dividends subsequently paid by Sky. However, certain material offer terms remain under discussion, and there can be no certainty that an offer will be made by 21st Century Fox, nor as to the terms of any such offer."

It added: "The independent directors, who have received financial advice from Morgan Stanley, PJT Partners and Barclays, have indicated to 21st Century Fox that they are willing to recommend the proposal to Sky shareholders, subject to reaching agreement on the other terms."

In a statement, Fox said: "In the past several years, 21st Century Fox has consistently stated that its existing 39.1 percent stake in Sky is not a natural end position. A proposed transaction between 21st Century Fox and Sky would bring together 21st Century Fox's global content business with Sky's world-class direct-to-consumer capabilities, which have made it the number one premium pay TV provider in all its markets ... There can be no certainty that any offer or transaction will proceed."

The proposal represents a premium of 40 percent to the closing price on Tuesday, the firm said, that date "being the last business day prior to the initial proposal being received from 21st Century Fox," and a premium of 36 percent to the closing price on Thursday. 

Sky, led by CEO Jeremy Darroch, has formed an independent committee of the board to consider the terms of the offer. Sky's chairman is Fox CEO James Murdoch.

“Discussions are continuing and a further announcement will be made in due course as appropriate,” Sky said. “21st Century Fox is required to clarify its intentions by no later than 5:00 p.m. on Friday 6th January 2017 (or such later date as the takeover panel may consent to in relation to 21st Century Fox, at the request of Sky), by either announcing a firm intention to make an offer or that it does not intend to make an offer.”

In 2011, what was then known as News Corp. before it split into Fox and News Corp, withdrew a bid for full control of Sky amid the phone-hacking scandal at the company's U.K. newspaper unit. "We do not think there would be any ... political or regulatory issues" for the deal, said Liberum Capital analyst Ian Whittaker.

"The U.K. government is keen to promote investment in the U.K. post the Brexit vote," he said. "We doubt therefore it would want to veto what could be viewed as a major sign of confidence in the U.K. market." And he added: "The furor over phone hacking has died down, and the government is now a majority Conservative one, not a Conservative-Liberal Democrat coalition" as at the the time of the 2011 bid.

Fox touched on the issue of the U.K.'s role and position in the entertainment and technology industries. In its statement, it said a deal would "reinforce the U.K.'s standing as a top global hub for content generation and technological innovation."

Industry observers have repeatedly debated this year whether Fox would look to buy full control of Sky. Some said that Sky's post-Brexit referendum stock decline could drive Fox to take another look. Fox top executives have in the past signaled they had no immediate plans to buy full control or sell the Sky stake, but always emphasized owning 39 percent was not an ideal end state.

"At the moment, there is no urgency for us to do anything other than harvest value out of Sky," said Fox CFO John Nallen before the Brexit vote. "There is no catalyst for us to say we need to change that.”

James Murdoch in October 2015 had told THR that the company was focused on letting Sky integrate its operations after BSkyB bought from Fox Sky Italia and Sky Deutschland. "Right now, we're 100 percent focused on supporting the company to get this integration going and get it done for the business to move forward, so there are no plans on the agenda right now," he said at the time.

Earlier this week at a UBS investor conference in New York, he only said he had nothing new to say about the topic. "The Sky business is a great business," he said. "At this point, we haven't made any decision."

RBC Capital Markets analyst Steven Cahall wrote in a first reaction that "the British pound's devaluation against the U.S. dollar of 15 percent year-to-date was likely a key consideration" in the bid. The pound has been particularly hit by June's Brexit referendum.

Macquarie Capital analyst Tim Nollen had similarly written in a report on Aug. 25: "We have long believed 21st Century Fox may look again at buying in the 61 percent of Sky that it doesn’t own, if the timing and circumstances were right. We think that moment has come, with Sky shares down 32 percent year-to-date in U.S. dollar terms."

The companies didn't immediately outline possible financial benefits of a deal. Cahall estimated that if it brings only $100 million in cost savings, it "would be around 7 percent accretive to fiscal year 2017 adjusted earnings per share."

Fox's stock as of 12:15 p.m. ET was down 1.9 percent at $28.09. "We think investors were concerned that Fox would splash out into growthier/techier/riskier areas,” Cahall said on Friday. “Sky is well known to investors, generally liked, possibly highly synergistic and likely accretive to earnings per share. This should help investors gain comfort in Fox longer-term."

Jefferies analyst John Janedis said: "It's unclear to what extent investors want Fox's non-U.S. exposure to increase at this point in the cycle." But he highlighted: "Financially, the offer is attractive for Fox shareholders given that prior to the announcement Sky shares were down about 30 percent year-to-date and the pound/dollar rate is near 30-year lows."