The independent directors of BSkyB have rejected News Corp’s proposed 700 pence per share cash offer for the 60.9% it does not already own in the UK satellite broadcaster.
The offer price represents a premium of approximately 22% to BSkyB’s share price…
The independent directors of BSkyB have rejected News Corp’s proposed 700 pence per share cash offer for the 60.9% it does not already own in the UK satellite broadcaster.
The offer price represents a premium of approximately 22% to BSkyB’s share price of 574 pence at the close of business on June 9, the day prior to News Corp’s approach, and values the company at £12.8bn.
News Corp initially approached the BSkyB board on June 10 with a 675 pence per share proposal but, following discussions with the broadcaster’s independent directors, upped its offer to 700 pence per share.
However, in response, the eight BSkyB independent directors released a statement saying that they “unanimously consider the terms of the proposal to undervalue significantly BSkyB and they would not recommend it.”
The directors, who are being advised by Morgan Stanley and UBS, added that they have indicated to the US media giant that they would be prepared to support a proposed offer in excess of 800 pence per share. BSkyB’s share price subsequently jumped to over 700 pence per share following the announcement.
The BSkyB board has subsequently passed a resolution to appoint a committee comprising the independent directors and the executive directors to represent the interests of the shareholders in relation to the possible offer. BSkyB’s chairman James Murdoch, who is a senior executive at News Corp, is not involved in the bid process.
In addition, Nicholas Ferguson, the senior independent non-executive director, will be appointed as deputy chairman of the BSkyB board. Ferguson has already suggested that he would like to meet some of the broadcaster’s larger shareholders to get their view on the offer.
Deutsche Bank and JPMorgan Cazenove are acting as financial advisers to News
Corp, with Skadden Arps Slate Meagher & Flom providing legal advice. Herbert Smith is legal adviser to the BSkyB directors.
Pair seek regulatory green light
While News Corp ponders whether to up its offer, the two parties have agreed to work together to proceed with the regulatory process in order to facilitate a proposed transaction. The transaction requires approval from both the UK and EU competition regulators.
Under the cooperation agreement, BSkyB has agreed that it shall not request that the Takeover Panel issue a “put up or shut up” notice on News Corp, while the latter has agreed not to buy any BSkyB shares until at least two months after receiving regulatory clearance of the merger.
In addition, News Corp has agreed to pay BSkyB a fee of up to £20m if merger clearance is not granted, or granted subject to a material remedy. If, however, the planned transaction is approved by the regulators prior to December 31, 2011, then News Corp will pay BSkyB a fee of £38.5m if it fails to make a firm offer within five months.
Any transaction would also be seen as a test of the coalition Government’s attitude to media consolidation and the power of the Murdoch empire.
Culture secretary Jeremy Hunt said: “It does seem to me that News Corp do control Sky already, so it isn’t clear to me that in terms of media plurality there is a substantive change, but I don’t want to second guess what regulators might decide.”
News Corp’s logic
While News Corp believes that its current proposal represents an attractive valuation, approximately 11.8x BSkyB’s EBITDA for the 12 months to March 31, it is widely expected that the company will stump up the additional 100 pence per share to snare BSkyB as the upsides to achieving the deal far outweigh the additional £1bn that would be required.
Firstly, a takeover would reduce News Corp’s dependence on cyclical advertising revenues, increasing the percentage of income derived from more stable subscription revenues from around 10% to more than 28%. It would also lessen News Corp’s reliance on its US-based business, resulting in these contributing less than 50% of group revenues.
Finally it could pave the way for a European-wide consolidation of its satellite broadcasting assets, bringing together BSkyB with Sky Deutschland and Sky Italia. The German pay-TV provider has been struggling to make its business model work in a country dominated by cable operators, but investors reacted well to the BSkyB proposal, with Sky Deutschland’s share price leaping by more than 18% on the news.
When commenting on the proposed offer, Chase Carey, deputy chairman, president and COO of News Corp, stated: “For News Corporation, our proposal presents an opportunity to consolidate a core business with which we have been closely associated for over two decades. News Corporation will also benefit from increasing the geographic diversification of our earnings base, reducing our exposure to cyclical advertising revenues and increasing our direct consumer subscription revenues.”
News Corp’s own shareholders also reacted positively to the plan, with the media giant’s share price rising by approximately 10% on the announcement to US$14.35. News Corp currently has a market cap of US$37.7bn, with total assets as of March 31 of approximately US$55bn and total annual revenues of US$30bn for the fiscal year 2009.
In order to fund the transaction, News Corp is expected to use cash-on-hand to finance over 60% of the purchase price with the rest through newly issued debt.
One banker told MediaFinance that he expected New Corp to launch a debt facility in the region of US$4bn to help fund the takeover.
