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Here’s How the AT&T-Time Warner Deal Is Influencing Fox’s Bid for Sky

December 12, 2016

Executive Chairman of News Corp and Chairman and CEO of 21st Century Fox Murdoch arrives on the red carpet during the second annual Breakthrough Prize Awards in Mountain ViewExecutive Chairman of News Corp and Chairman and CEO of 21st Century Fox Murdoch arrives on the red carpet during the second annual Breakthrough Prize Awards in Mountain View
Executive Chairman of News Corp and Chairman and CEO of 21st Century Fox Rupert Murdoch arrives on the red carpet during the second annual Breakthrough Prize Awards at the NASA Ames Research Center in Mountain View, California November 9, 2014. Photograph by Stephen Lam — Reuters

Rupert Murdoch’s Twenty-First Century Fox aims to table a firm cash bid valuing British broadcaster Sky at 10.75 pounds per share as early as Wednesday to help him buy the rest of the company, four people familiar with the matter said.

The two companies have agreed to press ahead with a scheme of arrangement which is a court-approved agreement typically used in friendly takeovers in the U.K., two of the sources said on Monday.

This could make it easier for Fox to wrap up a deal as it would only require 75% approval from shareholders, against 90% through a straight takeover under U.K. rules.

This comes after Fox made a proposed offer of the same value on Friday and received the backing of Sky’s independent directors.

Sources said Fox (FOX) does not plan to increase its bid for the time being as it had already significantly improved a previous offer which was not made public. Murdoch is also expected to keep Sky’s chief executive Jeremy Darroch to run the business as he wants continuity for the company, two of the sources said.

If successful, Murdoch’s second attempt to acquire the 61% in Sky it does not already own would give him full control of a pay-TV network spanning 22 million households in Britain, Ireland, Austria, Germany, and Italy.

Murdoch, who also owns The Sun and The Times newspapers through his other company NewsCorp, has long seen a tie-up with Sky as a logical, strategic deal and is especially keen to get direct access to Sky’s customers, one of the sources said.

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Sky could push for a sweetened bid once a firm offer is tabled, the sources said, since several small shareholders including Standard Life, Jupiter Asset Management, and Royal London have sought a higher price and questioned the initial green light given by Sky’s Independent Committee.

Shareholder Unease

Sky created the Independent Committee of directors to assess the deal in a move to ease shareholders’ concerns on governance given that James Murdoch is both the chairman of Sky and the chief executive of Fox.

“It would have been preferable to have an independent chairman,” said Piers Hillier, CIO at Royal London Asset Management. “The creation of an independent committee of the board (excluding James Murdoch) to consider the bid addresses some of the conflicts of interest, however it doesn’t go far enough.”

Fox had previously tried to expand in its home market but had to abandon a $80 billion deal to acquire Time Warner after the company rejected it.

AT&T’s (T) successful $85 billion bid for Time Warner (TWX) in October was one of the triggers pushing Murdoch to grow by bidding for Sky, said one of the sources adding that the two companies started talks shortly after the U.S. election.

Sky was down 33% so far this year before Fox’s offer emerged. It has now rebounded on the prospect of a deal but is still down 11% compared to January, according to Thomson Reuters data.

“In terms of valuation, the offer is at the low end, considering stock price levels at the end of last year as well as our internal intrinsic value,” said Kai Fachinger, senior portfolio manager at RobecoSAM, a minority Sky shareholder which recently increased its stake in the British company.

“Assuming some cross-synergies, both on cost and revenue, we would expect the fair premium to be some 5-10% higher at least.”

However, the mean average of 22 analysts polled by Thomson Reuters currently price Sky at GBP 10.31.

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Fachinger said he expected Murdoch to push through a deal “whatever it costs” after his failed 2011 attempt to buy Sky through his News Corp business.

That attempt provoked uproar among some U.K. politicians, who said it would give the billionaire owner of The Sun and The Times newspapers too much control over the country’s media.

It collapsed when Murdoch’s U.K. newspaper business was engulfed in a phone hacking scandal that intensified political opposition, resulted in a criminal trial and led to the closure of his News of the World tabloid.

People familiar with the matter said Fox had seen the opportunity to try again after Britain’s vote to leave the European Union in June sent the pound down about 14% against the U.S. dollar and Sky’s share price tumbling.