Today, the Competition and Markets Authority announced its long-awaited decision on the takeover of Sky (LSE: SKY) by the Murdoch family’s 21st Century Fox. In a statement that’s unlikely to please the billionaire media mogul, the regulator has declared that the merger is not in the public interest because it is likely to have an effect on media plurality in the UK.
Specifically, the CMA report declares: “Our view is that although the MFT [Murdoch Family Trust] will not have full ownership of Sky following the transaction, the significantly increased control it will be able to exercise over Sky and Sky News is sufficient to give rise to concerns that, as a result of the transaction, there could be increased editorial alignment of Sky News and the newspapers owned by News Corp.”
However, while the regulator is recommending that the deal should be blocked in its current form, it does say that it could go ahead with a spin-off or divestiture of the Sky News operation “to insulate Sky News from the Murdoch Family Trust’s influence.”
But the CMA’s statement also acknowledges that Fox is in the process of selling itself to Disney in a $52.4bn deal agreed last year. This deal includes Fox’s stake in Sky. And if this merger is given the green light by US regulators, the CMA acknowledges that the concerns around plurality could “fall away.”
Put simply, as everything stands today, it’s unlikely Fox will be allowed to acquire the 61% of Sky that it does not already own (the deadline for the CMA’s final report to the Secretary of State is 1 May 2018).
What’s next for investors?
So, what does this mean for shareholders? I think it could be good news.
Sky is a highly profitable and growing business. At the end of this week, the company is slated to report its earnings for the six months ended 31 December 2017 and analysts are expecting pre-tax profit growth of 10%. For full-year 2018, earnings per share growth of 28% is projected, followed by an increase of 10% for 2019. If the merger stalls the group is also set to restart dividends with analysts estimating a yield of 3.5% on offer. Further, when the deal was announced, shareholders were promised a 10p per share special dividend if it fell apart.
Overall then, as a standalone business, Sky is growing and blocking Fox’s bid is unlikely to slow growth. What’s more, it’s highly likely that if the Disney/Fox deal goes ahead, at some point in the future Disney will make an offer for the rest of Sky If the UK-based media group continues to grow earnings at a rate of 10% or more per annum, to convince shareholders to sell, Disney will have to make an offer that’s greater than Murdoch’s 1,075p per share price.
All in all, even though the CMA’s recommendation is disappointing, over the next week, I’m going to be buying more Sky for my retirement portfolio. The business continues to expand, and at some point, I believe either Disney or Fox will make another attempt to absorb the company at an improved price.
