LONDON (Reuters Breakingviews) - Rupert Murdoch’s bid for Sky looks ever less rational. The media mogul’s Twenty-First Century Fox in December offered 11.7 billion pounds to buy the 61 percent it doesn’t own of the UK pay-TV group. Murdoch will struggle to make the deal pay – though that may not stop him.
Murdoch’s main motivation probably isn’t return on investment. His son James – also Fox chief executive and Sky chairman – said in 2015 that Fox’s minority stake in the company his father helped set up “is not an end state that is natural for us”. Sky’s steady subscription revenue would also give Fox another predictable and geographically-diversified stream of cash flows, and the combined company would have greater clout in the global race for pricey TV content.
It’s nonetheless difficult to make the numbers add up. Fox’s offer would value Sky, including its net debt, at around 25 billion pounds. Murdoch would effectively be acquiring 15 billion pounds of that. Based on analysts’ forecast operating profit for Sky next year and taxed at Fox’s 30 percent rate, the return on investment would be 670 million pounds, or a measly 4.4 percent. To meet Sky’s probable cost of capital, say 8 percent, Fox needs to find synergies that boost operating profit by a whopping 800 million pounds – 50 percent of analysts’ forecasts for Sky in 2018.
That was an issue back when the bid was tabled last December. Since then, things have deteriorated. In the 12 months to June, Sky added almost 40 percent fewer UK and Ireland retail customers than in the same period a year earlier. It could make up for this by cross-selling mobile and broadband services, but on the other hand, sports-rights costs may keep spiralling. A politically-fraught second regulatory review in the UK is also likely to impose further delays, and campaign group Avaaz plans to request a judicial review. Sky’s share price is more than 11 percent below the offer, suggesting it could take some time to close, or that there is a real possibility it won‘t.
Buying Sky at a sensible price never seemed front of mind for Murdoch and Fox. For the deal to go ahead now, it would appear to be positively an afterthought.