After several months of waiting, Sky‘s (LSE: SKY) shareholders have found out today that the Rupert Murdoch’s Twenty-First Century Fox bid to seize full control of the company will face further scrutiny from regulators. Today Culture Secretary Karen Bradley said she is “minded to” refer the takeover to the competition and markets authority.
This conclusion follows a three-month investigation by the media regulator Ofcom, which seems to have concluded that the deal will hand too much influence over the UK media to Murdoch-controlled entities. The deal is not dead just yet though as the parties have until July 14 to respond before Ms Bradley makes her final decision on referral. Other regulators in the EU and Ireland have already passed the deal.
For shareholders, this outcome is a mixed blessing. On the one hand the chances of the deal going ahead are now much reduced, but on the other hand, if Fox does not complete the transaction it has agreed to pay Sky a £200m break fee. Fox had also planned to complete the takeover by the end of 2017, or pay a 10p per share special dividend, which would cost the media group just under £172m.
If the deal does not go ahead, while Sky’s shareholders will not receive the 1,075p per share in cash promised, the company will likely return the break fee to investors in addition to the special dividend. With this being the case, it’s no surprise that shares in Sky have rallied by nearly 4% on today’s news.
Still a buy
From a longer-term perspective shares in the pay-TV provider also look attractive. At the end of April, the company released its results for the nine months to the end of March, showing a 5% increase in revenue on a constant currency basis, despite a 3% fall in advertising revenue. For the British TV advertising market as a whole, revenue fell about 8% so on this metric, Sky is outperforming the rest of the industry. The group’s European divisions also reported a strong performance with revenues up 10% in Germany and 7% in Italy.
Unfortunately, due to higher costs associated with sports broadcasting rights, profits took a hit during the period, and City analysts expect this to be reflected in full-year results. Analysts have pencilled-in earnings per share for the year of 56.5p, down 10% year-on-year. Nonetheless, for the fiscal year ending 30 June 2018, growth is expected to return with earnings per share growth of 17% projected.
Compared to this growth, shares in Sky don’t look overly expensive, currently trading at a forward P/E of 16.9, falling to 14.5 for 2018. In addition to this attractive earnings multiple, the shares support a dividend yield of 3.6% and the payout is covered 1.6 times by earnings per share.
Overall, while today’s news from the government is disappointing, it is certainly by no means the end of the Sky/Fox saga. The two companies will continue to push to get the deal done and if it falls apart, Sky is set to receive several hundred million pounds in benefits, an excellent sweetener for disappointed shareholders.
Sky has all the hallmarks of a company that can continue to generate impressive returns for investors for years to come. And high-quality companies like Sky are essential for building wealth over the long term and helping you achieve your goal of financial independence.
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Rupert Hargreaves owns shares of Sky. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.