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Big year-to-date decline and currency moves lead to takeover approach

We aren’t surprised by last Friday’s (9 Dec) £10.75 per share takeover approach for Sky (SKY), despite having held a bearish view towards the stock for some time.

Just over a week ago we decided internally to reappraise the stock given a 30% decline in the share price year to date.

We felt the valuation had become more attractive, despite retaining concerns about its business model longer term.

The depreciation of sterling also made the stock 15% cheaper in US dollar terms than it would have been prior to the Brexit vote.

It would have been a good call had we not been constrained by the fact the digital version of Shares is only published once a week.

21st Century Fox (FOX:NYSE) tabled its £18.5bn approach before we had a chance to publish our thoughts on Sky as a standalone business.

Sky’s shares have jumped to 995.75p, some way off the proposed offer price as experts reckon there are many regulatory and antitrust hurdles to clear before this is a done deal.

What should you do?

Existing shareholders should consider taking profit; prospective investors shouldn’t bother buying the stock in the hope of making a small margin.

It isn’t worth holding out for an extra 80p, in our view, as there are still risks to the deal completing.

Fundamentally we still dislike the company. Competitive pressures are driving up the costs of football TV rights and there are growing pains in its core UK business. Amazon (AMZN:NDQ), Netflix (NFLX:NDQ) and BT (BT.A) are becoming serious rivals.

These are just a few reasons among many as to why its share price had been weak this year.

Why does Fox like Sky?

Fox wants direct to access to consumers, argues investment bank Berenberg.

Sky’s business model is relatively simple. It charges viewers a monthly fee for access to its television, broadband and phone services.

It has two obvious levers for growth: increase the number of subscribers and/or increase the average revenue per user by selling them more services or content.

The launch of Sky Mobile in November 2016 made the company a ‘quad play’ provider offering broadband, TV, fixed-line telephone and mobile services.

What next?

Fox must announce its firm intention to make an offer by 5pm on Friday 6 January 2017 or walk away.

A counter bid look slim as Fox already has the upper hand by owning 39% of the business.

Murdoch’s News Corporation tried to buy Sky in a 700p per share deal in 2010 but the deal collapsed amid a phone hacking scandal and concerns over the undue influence of Murdoch on UK mass media.

His company split into two in 2013 – News Corporation (NWSA:NDQ) and 21st Century Fox – which means the entity making the approach for Sky no longer has direct control of UK newspapers.

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