While Twenty-First Century Fox appears to be paying a reasonable price for Sky, we're not wowed by the potential acquisition of a satellite operator at a time when content distribution is increasingly moving online.
Sky announced on Dec. 9 that the company agreed in principle to a preliminary takeover bid from Twenty-First Century Fox
for the 61% of the firm not already owned by Fox. The preliminary offer of GBP 10.75 in cash would value Sky at about GBP 18.5 billion ($23 billion), a 36% premium to closing price on Dec. 8. The offer price is only a 6% premium to our fair value estimate of GBP 10.10 for Sky, which we viewed as undervalued prior to the announcement, so Fox appears to be paying a reasonable price for Sky. We note that the offer is preliminary and that Fox has until Jan. 6, 2017, to make a formal offer, but we think there is a high likelihood that Fox will do so. Since Fox already owns 39% of Sky, we don’t foresee a bidding war and think that any potential deal will likely pass regulatory scrutiny, at least at this point. Given the preliminary nature of the offer, we are maintaining our wide moat rating and $35 fair value estimate for Fox. Although shares are trading in 4-star territory and remain fundamentally undervalued, we view an even more attractive margin of safety within the media space in wide-moat Disney.
Neil Macker, CFA, is an equity analyst for Morningstar.
Strategically, we see both positives and negatives associated with the deal. On the plus side, Sky is one of the leading pay television operators in Europe and produces a large amount of original programming. Further, Sky’s relationship with HBO could also potentially help Fox in the U.K. That said, we are not enamored with the potential acquisition of a satellite operator at a time when content distribution is increasingly moving online.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.