With Comcast and Fox deep in a bidding war, is Sky worth the price tag?
Russ Mould, investment director at AJ Bell, says YES.
Economic theory dictates that competition for an asset will set that asset’s price, and the battle between Fox and Disney on one side and Comcast on the other means that a further knock-out bid for Sky has to be a possibility for strategic and financial reasons.
Sky’s strong competitive position, based on its control of the prime content that is loved by its loyal customers, gives it pricing power. Pricing power means good margins and strong cash flow.
At £15.30 a share, Sky has a market cap of £26.3bn. It has £7.5bn in net debt for an all-in purchase price of £33.8bn, which compares to forecast annual free cash flow of some £1.5bn to £1.6bn a year, factoring in lower football costs.
That implies a free cash flow yield of 4.7 per cent, which beats cash in the bank, the rate offered by 10-year UK Gilts or US Treasuries, or the four per cent dividend yield available from the FTSE 100 overall.
Read more: Fox-Sky bidding war: What's next?
Laith Khalaf, senior analyst at Hargreaves Lansdown, says NO.
Sky is a great business, but the bidding war between Comcast and Fox, with Disney in the background, is beginning to lose perspective.
Fox’s first offer of £10.75 per share was recommended by the Sky board, and at that time represented around a 40 per cent uplift on the share price. The board’s acceptance of that deal was tacit confirmation that the offer fully valued the company.
Fast-forward to 2018 and Comcast’s latest bid of £14.75 is almost twice where the share price stood before the takeover battle started. No matter how many synergies and strategic benefits you can wring out of such a deal, it’s hard to see how you can double the value of a company simply by acquiring it. Stocks can be mis-priced, but such a large anomaly would be a blow indeed to anyone who believes markets have at least some modicum of efficiency.
Of course, this is all great news for Sky shareholders, who are set for a bumper payday, and good luck to them.
Comcast and Disney investors might be more circumspect however.
Read more: Sky's the limit: Comcast raises bid to $34bn