16 August 2010

Murdoch's BSkyB Bid Grows More Costly as Pound Gains


Rupert Murdoch’s bid for the rest of British Sky Broadcasting Group Plc has become $700 million more expensive after the pound’s 6 percent gain against the dollar.

News Corp.’s 7.8 billion-pound bid for full control of the U.K.’s biggest pay-TV operator, dismissed by some investors as too little, was worth $11.5 billion when it was announced on June 15. It is now valued at about $12.2 billion. For News Corp. the cost in dollar terms may continue to climb, limiting its ability to raise the offer.

“It may make it more of a challenge for News to get to a price that we and most of the market feel they need to pay,” said Nick Bell, an analyst with Jefferies International in London. “It has been a very material rise since the deal was announced.”

Murdoch, chairman and chief executive officer of News Corp., wants full control of BSkyB to gain from its steady subscription business. He also has his sights set on the U.K. broadcaster’s cash flow, which increased 23 percent in the year ended June 30 to 626 million pounds as it reaped the rewards of investments in broadband and high-definition television.

The companies failed to agree on a price for 61 percent of BSkyB that News Corp. doesn’t already own and said they will focus on gaining regulatory approval first.

News Corp., based in New York, doesn’t hedge its investments in foreign operations, according to its U.S. regulatory filings. In an Aug. 6 filing, the company said that potential fluctuations in the pound may affect the amount of cash needed for the BSkyB deal.

The British currency traded at a six-month high against the dollar on Aug. 6. One pound now buys $1.5658, up from $1.48 in June.

‘Get More’

“Sterling may continue to do well,” Audrey Childe- Freeman, a senior currency strategist at Brown Brothers Harriman Ltd. in London. “The U.K. is a little ahead of the U.S. when trying to deal with the big-debt predicament.”

According to Bloomberg’s survey of 32 analysts, the pound may buy as much as $1.68 by the end of the first quarter of 2011. The median estimate is for $1.52.

The pound’s strength also means News Corp. will book greater BSkyB revenue when it’s converted into dollars.

“It looks more expensive, but they will get more from it,” said Lorna Tilbian, an analyst at Numis Securities in London.

A News Corp. official in London declined to comment on the impact of the pound’s gain on the deal. News Corp. will register its proposed purchase with the European Commission “very shortly,” Murdoch said last week. Both parties have said they will focus on regulatory approvals for the deal that would be Murdoch’s biggest acquisition.

Greater Scrutiny

“It could be 6 months or 12 months, but certainly not more than 12,” Murdoch said on Aug. 4. “We would be very disappointed if it went beyond this fiscal year.”

The transaction could take longer than one year if U.K. regulators and lawmakers intervene, said Martin Baker, an antitrust lawyer with the firm Taylor Wessing LLP in London.

“Anything to do with News Corp. tends to get scrutinized heavily by regulators,” Baker said. “On the whole, the merger control issues here are pretty benign. The battle will be over plurality of the media.”

BSkyB, based in Isleworth, England, in June rejected News Corp.’s offer of 700 pence a share. The independent directors, led by Nicholas Ferguson, chairman of SVG Capital, said they may accept an offer of more than 800 pence a share. There is a “significant gap” between News Corp.’s proposal and the company’s value, Ferguson said.

Small Premiums

News Corp. has said it plans to raise about $4 billion in debt to fund the purchase, and use cash for the remainder. The company has about $8.71 billion in cash.

Analysts at Citigroup Inc., Investec, Macquarie Securities, Numis Securities, Sanford C. Bernstein and Singer Capital Markets have named figures between 750 pence to 860 pence per share as a potentially acceptable price for shareholders.

Others such as Alan Gould, a New York-based analyst with Evercore Partners, said News Corp. pays small premiums when buying companies in which it has stakes, such as Fox.

“The history of News Corp. has been that they haven’t paid huge premiums once a deal’s been announced,” Gould said. “You have to pay a fair price. It doesn’t mean you have to pay an overly exorbitant price. There’s no reason for News Corp. to compete against itself.”

Gould estimates News Corp. may raise its bid to about 725 pence a share.

‘Disciplined Approach’

News Corp.’s Chief Operating Officer Chase Carey, who is leading the negotiations for BSkyB, said last week he isn’t talking to the independent board at this time.

Carey reiterated the offer was “full and fair” and said the company will take a “disciplined approach” to the deal.

News Corp. fell 25 cents, or 1.9 percent, to $13.14 at 4 p.m. New York time in Nasdaq Stock Market trading. The shares have dropped 4 percent this year.

BSkyB shares have gained 26 percent this year. They fell 2 pence to 706 pence today in London. BSkyB has traded close to 700 pence since the offer was announced, indicating investors are waiting for a formal offer to be announced before buying more shares, according to Panmure Gordon analyst Alex de Groote.

“The shares will narrow the gap as and when we get information that the deal is more firm,” he said.

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