What's Next in the Bidding War for Sky?

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Comcast CEO Brian Roberts

Investors should expect more back-and-forth in the battle between the Murdoch family and Comcast CEO Brian Roberts in the weeks ahead.

While top executives for Disney, Comcast and 21st Century Fox are working, and relaxing, in Sun Valley, Idaho, at the annual Allen & Co. gathering of media and tech moguls, a showdown for European pay-TV giant Sky continues to play out in London.

As of late this week, the U.K. government has given final clearance to Fox's bid for full ownership of Sky, of which it already owns 39 percent. Comcast previously got clearance to proceed with its pursuit of Sky. That means that "both offers for Sky are now capable of being put formally to Sky shareholders," Sky said Thursday afternoon London time, with the independent committee of its board set to continue to evaluate all new bids going forward. 

And Wall Street expects the bidding showdown to continue further into the summer.

Fox had offered in December 2016 to take full ownership of the company in a £10.75-per-share deal, which valued Sky at roughly £18.5 billion, or $23.2 billion at the time. Comcast earlier this year unveiled a £22.0 billion ($31 billion) takeover offer for Sky, or £12.50 a share, a 16 percent premium to Fox's original bid.

Early on Wednesday, Fox increased its bid for Sky to £24.5 billion, or £14 per share, or $32.5 billion, only to be trumped again late in the day by Comcast's offer of £26 billion, or £14.75 per share, or $34 billion. "Comcast has long admired Sky and believes it is an outstanding company and a great fit with Comcast," the jockeying suitor said. "Today’s announcement further underscores Comcast’s belief and its commitment to owning Sky."

Fox and Comcast on Thursday didn’t disclose their plans for further bids. Comcast said it would close the deal before the end of October. But investors and analysts, along with a banker not involved in the bidding, don't expect Fox to sit idly by. They expect Disney will support Fox's battle for control of Sky since Disney is also looking to buy many of Fox's entertainment assets in a second showdown with Comcast.

So investors should expect more back-and-forth on Sky in the weeks ahead.

With Sky shares hitting an 18-year high this week, investors are betting the bids will rise. Jefferies analyst Jerry Dellis boosted his price target on the stock to £17.50 ($23.10), which implies 13 percent growth from Thursday's closing price of £15.45 ($20.43), which valued Sky at £26.7 billion, or about $35.3 billion.

“Next steps in the saga will likely include an auction-style bidding process, with a decision finalized within the next couple months,” Jefferies analyst John Janedis said in a Thursday report.

Comcast on Friday, the last possible day to do so, published for shareholders its formal offer document containing full terms and conditions of its bid and the procedures for its acceptance. 

Fox must publish a formal document with details of its offer within 28 days of Thursday’s final government approval. Analysts and a banker said that will likely come after Fox raises its offer above Comcast’s bid.

After publishing their offer documents, suitors will have 46 days to update the price and terms of their bids as part of a 60-day window before a final shareholder decision on the deal, according to the rules of Britain’s Takeover Panel, which regulates the takeover process. Analysts and industry watchers said the panel would in this case align the schedules for both bidders so there is a shared timeline for an independent committee of Sky’s board to compare the offers and recommend the one it deems better to shareholders.

“When a competitive situation continues to exist at 5 p.m. on Day 46 and no alternative procedure has been agreed between the competing offerors, the board of the offeree company and the [p]anel,” a five-day auction process to determine the suitor whose offer will be recommended to shareholders, according to Britain’s Takeover Code.

Some on Wall Street continue to hope that Comcast will focus its pursuit on Sky and leave the remaining assets Fox has agreed to sell to Disney, allowing both sector giants to claim a victory. In the bidding for Fox, Disney is the frontrunner, with a $71.3 billion offer that trumped Comcast’s $65 billion.

“Thematically, splitting the baby looks good for both Disney and Comcast,” said B. Riley FBR analyst Barton Crockett in a report. “Investors have been concerned about a costly bidding war. We thought from the beginning that the best outcome would be splitting the baby, with Comcast getting what we thought it wanted most (Sky) and Disney keeping the rest, and avoiding a controversial detour into the (pay-TV) distribution business via Sky.”

Echoed Buckingham Research Group analyst Matthew Harrigan: “Comcast and Fox/Disney have to be careful not to engage in any collusion on splitting up the Fox/Sky assets, but we reiterate that a scenario where Comcast gets Sky and Disney gets the Fox assets seems credible.” He added: “We still perceive Disney as the most likely winner for the in-play Fox studio and network assets.” Crockett said splitting the spoils would limit the cost for both suitors and “position Disney to effectively reduce the cost of its Fox acquisition by nearly 50 percent.”

Richard Greenfield of BTIG notes that Disney CEO Bob Iger has called Sky the “crown jewel” of the Fox assets that Disney is trying to acquire and that the company has already created a division dubbed “international and direct-to-consumer," so it is unlikely Iger will back away from Sky for any reason.

“If Disney does walk away from Sky in return for Comcast abandoning its bid for Fox, effectively splitting up the assets, it certainly feels like the two sides worked together even though they are not allowed to talk to each other,” Greenfield opined in a report published Wednesday. “ Colluding without colluding? Feels like public shareholders of both Fox and Sky failed to get maximum value if there was in fact splitting-the-assets cooperation.”

Said Janedis: “We continue to believe Comcast ultimately wants both Sky and Fox assets, and that Comcast will come in with a higher bid for Fox in the coming weeks, prior to the July 26 Fox shareholder vote.”