Analyst Upgrades BSkyB Stock, Cites Potential 21st Century Fox Deal

Rupert Murdoch Oct 2013 P

Rupert Murdoch's entertainment conglomerate "could revisit a merger of its European pay-TV assets," which also include Sky Deutschland and Sky Italia, says UBS analyst Polo Tang.

LONDON – UBS analyst Polo Tang has turned bullish on U.K. pay TV giant BSkyB, in which Rupert Murdoch's 21st Century Fox owns a 39 percent stake.

Tang, who previously repeatedly expressed concern about increased competition from the likes of telecom giant BT, on Tuesday upgraded his rating on BSkyB shares from "neutral" to "buy."

"Competitive concerns priced in, but growth opportunities overlooked," he said in a headline. "We see BSkyB as cheap on fundamentals, with M&A optionality," he explained in the report.

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Tang suggested that over time, 21st Century Fox could consider another bid for full ownership of BSkyB. Fox was created in mid-2013 when News Corp. split into two. News Corp. abandoned such a bid for full control of BSkyB during the phone hacking scandal in 2011.

"Fox could revisit a merger of its European pay-TV assets to form Sky Europe," which would include BSkyB, Sky Deutschland in Germany and Italy's Sky Italia, Tang wrote. "To overcome political resistance to a deal, BSkyB could remain listed but have its operating assets injected into Sky Europe in return for a majority stake in the larger entity."

Other analysts and bankers have also suggested that Fox could take another run at BSkyB in the future.

Tang on Tuesday also suggested another scenario. "Alternatively, the move to quad-play [services that combine pay TV, Internet, phone and mobile offers] across Europe could also see BSkyB merge with either Vodafone UK or O2 UK," he wrote. "Such a deal could generate significant cost and revenue synergies."

He also said both deals could happen: Sky Europe could be created and later merged "with either Vodafone or Telefonica to produce a European quad-play operator."

Discussing business trends at BSkyB in the absence of deals, he predicted that the firm's operations "will remain resilient despite competition from the new BT Sport channel."

He added: "We think investors have overlooked significant growth from new initiatives," such as standalone broadband-based TV service NowTV. That and other newer services could add $348 million (£212 million) to BSkyB's profits by 2018, Tang estimated.

BSkyB's stock was up 3.7 percent as of 10:30 a.m. London time.

Twitter: @georgszalai