Against its FTSE 100 index that has fallen slightly year-to-date, Sky’s (LSE: SKY) performance has been nothing short of phenomenal with the company’s share price up over 50% since the beginning of January.
But although the media giant’s core business has been performing well of late, this dramatic increase in share price is almost entirely thanks to the three-way bidding war for Sky that was initiated by Rupert Murdoch’s 21st Century Fox and has now embroiled Disney and Comcast.
The latest twist in this long-running saga has been Comcast’s improved offer of 1,475p per share tabled earlier this month that would value the whole of Sky at £26bn – or a rather full-looking 12 times full-year 2017 EBITDA. But what does this mean for current and prospective shareholders?
For current shareholders, there’s little downside to holding their shares as they currently trade at just a 4% premium to Comcast’s latest bid. Considering Disney’s apparent willingness to engage in a bidding war for a ready-made pipeline for distributing its content to European households, I wouldn’t rule out another offer. But at the same time, with a full valuation and no guarantee of further bids, more conservative investors may want to take their profits and run.
Indeed, as a non-shareholder, I can’t say Sky’s current price appeals to me. Comcast’s latest bid values the company quite highly so buying its shares right now is pretty much nothing more than a bet on further bids being made for the business. In the end, Disney-backed Fox may decide to improve its latest offer, but as a long-term investor focused on buying great companies at attractive prices, not betting on M&A activity, I can’t say I find Sky a tempting target right now.
An under-the-radar income star
One telecom whose shares haven’t been enjoying a bumper run-up like Sky’s, is Isle of Man-based Manx Telecom (LSE: MANX). Manx, which is the island’s largest fixed line operator, has seen its share price fall back 14% over the past year.
This puts the company’s valuation at just 11.6 times forward earnings while offering investors a whopping 8.8% dividend yield. This valuation and well-covered dividend payout alongside decent opportunities for earnings growth make the company an interesting investment opportunity in my eyes.
Firstly, the company’s competitive position on the Isle of Man puts it in a great position as the island is small enough not to attract large competitors, but also large enough to sustain healthy profits after investment for Manx. Last year, the company’s generated underlying EBITDA of £27.1m off of £78.5m in revenue, which allowed it to both invest in future growth opportunities and increase its dividend payout while leaving net debt at a healthy 2.1 times EBITDA.
These growth opportunities centre around domestic-focused activities such as providing faster, and pricier for the customer, internet connections and providing data centres for businesses, as well as international growth opportunities such as its agreement with Chinese behemoth Unicom to provide UK roaming services for its customers. These expansion opportunities are unlikely to lead to rapid growth. But I reckon they offer the possibility of sustainable growth over the long term that should fund both investments in the business and increased payouts for shareholders – more than enough reason for me to consider Manx Telecom as a buy-and-hold income option.
