Fox’s Sky Stake in Focus Amid Management Shake-Up

Sky HQ H 2015
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“This will inevitably cause speculation as to whether Fox will sell its stake in Sky or, vice versa, launch another bid for the remaining shares,” says one analyst.

With James Murdoch set to become CEO of 21st Century Fox, industry observers are wondering if his expected promotion will change the conglomerate's approach to pan-European pay TV giant Sky, in which Fox owns a 39 percent stake.

Murdoch is a former CEO and chairman of U.K. pay TV giant BSkyB, of which the conglomerate, then known as News Corp., tried to buy full control in 2011 before abandoning those plans amid the phone-hacking scandal.

James Murdoch was a driving force behind last year’s deal that saw BSkyB acquire Fox’s Sky Deutschland and Sky Italia to create the bigger Sky, which operates in five European markets and says it is the biggest content investor on the continent.

So what does James Murdoch’s rise to the CEO role mean for Sky?

Media analyst and Enders Analysis founder Claire Enders tells The Hollywood Reporter "it would make a lot of sense" to buy full control or at least keep its current stake, saying there was value and strategic upside and full control would allow Fox to consolidate financial results. "Eliminating that scale in Europe would cause real damage to Fox's business," she says. "The status quo is perfectly acceptable. They get all the economies of scale without having full ownership, except for the financial consolidation benefits."

But she adds that critics will worry about paying too high a price tag. "In the original BSkyB bid, there were two opposing points of view," Enders says. "One was represented by Chase Carey who listened very closely to American investors who said we don't want [then-]News Corp. to overpay for Sky. [On the other hand,] James is a very aggressive bidder and saw the value that cash flow would double and that there would be operating efficiencies of Sky Europe."

Enders said past chatter of Vodafone, Vivendi and other companies' interest in Sky, which has not led to formal bids, shows the company's value. "It is entirely possible that the bid will be revived, also because after the election in the U.K. there is now a conservative majority, which will be very receptive to this transaction," Enders said.  

She predicts that there will be "a lot of debate" about the issue given U.S. investors traditionally don't like minority stakes in businesses. Either way, Enders predicts that James Murdoch "will not rush into something significant and be very mindful of the views" of shareholders and others and convince them of the best strategy.

"This will inevitably cause speculation as to whether Fox will sell its stake in Sky or, vice versa, launch another bid for the remaining shares it does not own," Liberum Capital analyst Ian Whittaker said Friday about James Murdoch's ascent. "Any succession may just mean business as usual but, on balance, it is likely that this move increases the chances Fox sells its stake."

His explanation: Since James was involved in the decision to sell Fox's stakes in Sky Italia and Sky Deutschland to Sky, "it would seem very odd for Fox to effectively be re-buying the assets."

Plus, U.K. pay TV sector trends seem to be more challenging these days, Whittaker said. "Fox may be feeling the U.K. market dynamics for Sky might be becoming less attractive.” He cited a just-announced launch by telecom giant BT of a Champions League soccer offering, deal talks between telecom giant Vodafone and John Malone’s pan-European cable giant Liberty Global and “our quarterly survey, suggesting that there has been a second successive uptick in those planning to cancel their Sky subscription."

All that said, Whittaker reiterated his "sell" rating on Sky’s stock.

MoffettNathanson analyst Michael Nathanson has also said it makes sense for Fox to sell its Sky stake or start reducing it. “We would strongly urge the company to sell down its Sky holding and use the proceeds to retire shares,” he wrote in a report. “This action would create a more efficient corporate structure, unlock long-term under-appreciated value and finish the transformation of Fox from media conglomerate to pure-play video content company.”

Another Fox and Sky observer, who didn't want to be named, said he expected Fox to keep holding its Sky stake for now and see how the business develops given upside in Italy and Germany and increased programming investment. Some also see a foothold in the pay TV business as a way to explore new business models in a rapidly changing TV sector.

Twitter: @georgszalai