Fox’s $33b bid for Sky pushes value so high that decent return would be hard to achieve

Rupert Murdoch’s Twenty-First Century Fox may be about to push the bidding war for Sky into crazy territory. A mooted new 25 billion pound ($33 billion) bid is too high for a buyer to make a decent return. That’s mostly a problem for Fox suitor Walt Disney.

According to the Financial Times, Murdoch’s entertainment group is mulling a new offer for the 61 percent of Sky it doesn’t own, valuing the British payTV group at about 25 billion pounds. Using the fully diluted share count in an offer document by rival bidder Comcast, that works out at about 14.21 pounds per share – higher than the 12.50 pounds per share the US cable group has offered for Sky, and way above Fox’s original offer of 10.75 pounds.

The price defies financial logic. Disney expects Sky’s EBITDA to reach 3.1 billion pounds by 2020, after the broadcaster pockets the benefit of a cheaperthan-expected deal for English Premier League soccer rights. Knock off forecasts for depreciation and amortization that year, deduct tax at Sky’s 19 percent rate, and the buyer will get 1.7 billion pounds. That’s equivalent to a measly 5 percent return on an investment of 32 billion pounds, including net debt.

Moreover, Sky’s earnings are unlikely to improve much over time. Disney’s most recent merger filing included EBITDA forecasts for the broadcaster running up to 2028. Repeat the same exercise, assuming depreciation and amortization stay flat, and the return by 2028 rises to just 6.7 percent. Since most analysts reckon media companies’ cost of capital is about 8 percent, an offer at that price would incinerate shareholder value.

The buyer’s hands are tied, however. After Disney raised its bid for Fox assets – including the Sky stake – by 36 percent to $71 billion, Britain’s Takeover Panel said it was considering whether the Mickey Mouse owner should extend a higher price to Sky’s other shareholders. Apply the same 36 percent bump to its earlier buyout price of 10.75 pounds per share, and the new level would be 14.59 pounds per share – not far off the latest figure reported by the FT.

Ultimately it is Disney, rather than Fox, that will have to fund such a high offer. At this stage, Murdoch is hardly a price-sensitive buyer.