What the Disney-Fox Talks Mean for Sky

Sky HQ - H 2016
Courtesy of Sky

Analysts discuss what's next as the U.K. continues to review Fox's bid for full control of the pay TV giant, of which it owns 39 percent, and whether the talks mean the Murdochs have doubts about approval.

Monday's news that Walt Disney held talks about buying assets from 21st Century Fox, including much of its international business, drew attention not just in Hollywood and on Wall Street. In London, industry watchers immediately wondered what the news means for European pay TV giant Sky.

After all, Fox owns a 39 percent stake in Sky and last December offered to take full control of it in a $15 billion deal, which U.K. regulators are still reviewing.

With the Disney talks reportedly having ended without a deal, Liberum Capital analyst Ian Whittaker wrote in a report Tuesday: "We still see a successful conclusion of the [Fox Sky] bid as the most likely conclusion, which means the [Sky] shares offer significant upside, however we understand this news will cause further uncertainty." He reiterated his "buy" rating on Sky's stock.

The news of the Disney talks was seen as having two negative implications for Fox's Sky bid, Whittaker argued. First, "Fox may scrap its bid for Sky as part of the proposed sale of assets," he wrote. "And second, Fox’s willingness to consider including the Sky stake as part of the disposal assets is a signal that it feels less confident over gaining regulatory approval from the U.K. government with the news that regulator Ofcom had stated the Fox News Channel had breached broadcasting standards, adding further fuel to the fire."

Ofcom had unveiled its ruling on Fox News on Monday, saying it breached impartiality rules in two cases.

Larry Haverty, associate portfolio manager of the Gabelli Multimedia Trust, also mentioned the long-running Sky deal review, which is expected to continue into 2018, as a possible reason why Fox held discussions with Disney. "I think talks [were] encouraged by the difficulty of the Sky deal closing," he told THR.

Several observers also pointed out that, given U.K. political opposition to the Murdoch family, which still owns the largest stake in Fox, Disney's acquisition of the 39 percent stake in Sky, or full ownership of it, would likely be seen more positively in Britain.

But B. Riley FBR analyst Barton Crockett wondered if a Fox-Disney deal could really have happened before final word on the Sky deal. "It would...seem strange to us that...[Sky chairman] James Murdoch would let Fox exit Sky before completing the bid to buy the 61 percent they don't currently own," he wrote. "We suppose Disney could face less regulatory scrutiny for the Sky acquisition than Fox. But Fox also reasonably believes its bid will ultimately be approved."     

What does all the news mean for the regulatory review in Britain of Fox's bid for all of Sky and Fox's commitment to the deal?

"I doubt very much this would interfere with the [U.K. regulatory review] process, which after all concludes in early March 2018," Alice Enders, head of research at Enders Analysis, told THR. "It has been rumored that this would lead to 21st Century Fox withdrawing from the Sky deal, but I doubt that very much. Relatively, 100 percent of Sky is worth much more than 39 percent."

Whittaker echoed the sentiment that Fox would push ahead with the deal. "While the news of the [Disney] talks may raise questions over the deal, we would still be confident that Sky will be bought," he said. "The actions of the U.K. government suggest that it is being extremely careful to ensure that the bid is seen to be scrupulously reviewed by the competition authorities. However, as we have stated here, the regulatory authorities already look to be indicating that the takeover should not raise any major concerns. If there are any roadblocks put in the way, it will be around ownership of Sky News, which we think Fox would be happy to sacrifice to get a deal."

And if Disney did end up in charge of various Fox assets, he argued that "Disney would likely be interested in Sky." Explained Whittaker: "If it did buy the Fox stake [in Sky], Disney itself could make a bid for the remaining stake."

But Credit Suisse analysts argued in a report that the Disney-Fox talks cause more uncertainty around the Sky deal, as some Disney investors may raise concerns about owning a pay TV giant abroad. While Disney may want to own Sky as part of its international streaming video strategy, "it is not clear whether the main Disney shareholders will agree and give their support to management on this point,” they wrote.

Sky hasn't commented on the news of the Disney-Fox talks. Its stock was down 1.1 percent as of mid-day Tuesday.