There will be a lot of rot written about the proposed mop up of Sky by 21st Century Fox (how evil it is etc), but there are two facts is that life to be confronted.
The first is that the Murdochs and Fox have controlled Sky News for years and nothing really changes. There is no change in media diversity in the UK or opinion. The other fact is more brutal – life in the media fast lane has slowed dramatically for the Murdoch family who are now very much second rankers in video and online potential (and dragging the chain at News Corp in newspapers).
Fox and the family have been passed in every asset of business, except Fox News which is a vital US asset, revenue, profit and cash generator. It is the beating heart of Fox, but that is not where the action is or the value adding for shareholder and family fortunes.
One comparison tells all – at Friday’s close on Wall Street, Fox was valued at $US51.8 billion after the shares dipped 2% on the news of the bid. But Netflix, the streaming video company which wasn’t on anyone’s horizon back in 2011 when the then News Corp launched a bid for the rest of Sky it didn’t own (just over 61%), was worth more with a market value of $US52.7 billion. That tells us more with the market sees future growth in video, content and all things entertainment and online.
And its that surge in value (Netflix shares were worth less than $US10 five years ago against more than $US122 last Friday) that has changed the pecking order in media and relegated the Murdoch clan’s companies to second ranking among the world’s media giants. And then there’s Amazon and its rapidly growing streaming video and associated businesses.
Last Friday it was worth more than $US360 billion. Five years ago streaming video might have been on a to do list, but Amazon was more interested in growing its cloud computing business. Amazon Web Services (AWS) which was launched five months before Fox’s first approach to Sky (then BSKYB) at 7 pounds a share (compared to the latest offer of 10.75 pounds). US analysts saw that if AWS was a separate company, its market value would be close to $US50 billion, or not much less than the current Fox value.
Fox may control Fox News, the rightwing cable news channel in the US and one of the few media beneficiaries of the Trump ascendancy, but in terms of future growth, Fox is in a dead end.
It has scrambled to get into the streaming business without too much success, it has built a major sports operation in Fox Sports, at a time when cord cutting ihas become rampant amont cable TV subscribers who are more interested in broadband based broadcasting, not cable or free to air.
Now AT&T wants to buy Time Warner, a move that will push it into number 1 slot. The irony is that two years ago Fox tried to buy Time Warner for a similar amount, and was forced to pull the bid by restive shareholders.
The Sky cost to Fox is around $US70 billion less, which tells us how Fox’s deal making ability is hamstrung by its lack of size. Disney is much larger than Fox, and will remain so after the Sky deal closes.
The empire of John Malone (Charter, the various Liberty media and Liberty Global stocks, Lionsgate and a host of smaller companies, Virgib Media in the UK and a stake in ITV) will be worth more than the Fox market value after the deal completes.
Verizon, still a telco, but with rapidly growing web businesses in AOL (including Huffington Post) and almost certainly the web businesses of Yahoo, is a much bigger company with the capacity to expand deeper into broadband broadcasting.
To buy control of Sky, the Murdochs will again have to bet the family company. Already burdened with more than $US19 billion at September 30, Fox will have to take on up to $US10 billion in debt to finance its clean up offer for Sky, a move that will boost the group’s total debts to close to $US40 billion.
Fox had just over $S4 billion in cash on its balance sheet at September 30 and the 11.2 billion ($US14 billion). But in taking control of Sky, Fox will have to take its debt of around $US11.2 billion on its balance sheet – boosting the total past $US40 billion.
Fox and the Murdoch beancounters will try and capitalise as much of this debt and other liabilities and transform it into assets (goodwill and intangibles).
Sky already has more than $US6 billion of goodwill and intangibles on its balance sheet.
Fox had more than $US48 billion in gross assets at September 30 and Sky will boost that by well over $US22 billion, so Fox could end up with around $US40 billion of debt and around $US80 billion of assets and a market value of less than $US70 billion, which even in these days of low (but rising) interest rates, will worry investors large and small who have seen Rupert Murdoch take his companies to the edge with huge debts in the past (1989 for instance).
But this deal would not have been possible without Brexit and the election of Donald Trump. Brexit in June (supported by The Sun, Murdoch’s attack dog UK tabloid) knocked the pound lower (down by 17% since the June high against the US dollar). That made the cost of Sky cheaper.
That fall in the pound add to the downward pressure on Sky shares in 2016 (down 37% in the year to date to last Thursday, the day before the mop up bid emerged).
That bid of 10.75 pounds is proposed at a price that Sky was at in February this year – before the slide in sterling and the Sky share price (big investors are worried the company is paying too much for sporting rights and will be forced to in 2017-18 when the next talks on the English premier soccer rights start).
The election of Donald Trump (backed by Fox News) has pushed the US dollar to 13 year highs, further cheapening Sky’s US dollar cost for the Murdochs and Fox.
But regardless of the favourable currency impact, there has been a huge cost for the Murdochs in waiting five years.
Back in 2011, News and the Murdochs were forced to withdraw the offer because of the phone hacking scandal, News had offered 7 pounds a share and the independent directors wanted 8 pounds.
2 The new mop up bid is at 10.75 pounds, meaning the final cost of the phone hacking scandal (up to $US2 billion from legal, restructuring, write off costs, lost advertising, the cost of closing the News of the World) will be more than $US3 billion, and up to $US4 billion (if you use the 7 pounds a share offer as the comparative base).
