Sky takeover by Fox back on agenda

Sky shares have traded largely sideways for the past 10 months, but a much better-than-expected set of interim results has given them a nudge nearer the top of the range. There's also news that James Murdoch is moving back into the chairman's role, which the gossips say could mean major shareholder 21st Century Fox (the film and TV interests of old News Corp) has another go at buying the British satellite TV giant. But not everyone's happy.

Murdoch retakes the chairman's position in April, having handed over to Nick Ferguson almost four years ago during the phone hacking scandal. Murdoch ran Sky for four years until 2007, before chairing the business until 2012.

Last time Murdoch was chairman, in 2010, his father's News Corp business tried to buy Sky for 700p a share in a takeover saga that lasted a year. It valued Sky at £12 billion and News Corp's 61% stake at well over £7 billion.

New York-based Murdoch still runs media giant 21st Century Fox, which still has a 39% stake in Sky. He said as recently as October that this situation could change. When asked by The Hollywood Reporter whether Fox would "finally buy the rest of Sky", Murdoch replied:

"We've also been clear that, over time, having 40% of an unconsolidated asset is not an end state that is natural for us.

"Right now, we're 100% focused on supporting the company to get this integration going and get it done for the business to move forward, so there are no plans on the agenda right now."

That may change now he's back in one of the top jobs.  But Ashley Hamilton Claxton, corporate governance manager at Royal London, is not happy. The asset manager, which owns 47 million Sky shares, called Murdoch's appointment "inappropriate".

"Should Fox make a bid for Sky, investors need a strong independent chairman to protect the interests of minority shareholders and negotiate the best possible deal," he argues.

In terms of the half-year numbers, Sky made an underlying profit of £649 million in the six months to December, up from £585 million a year ago. Numis Securities wanted £620 million. Earnings per share (EPS) jumped over 10% to 29.7p. Operating profit of £747 million thrashed forecasts, too.

"Over 337,000 new customers joined Sky in the second quarter and we sold 1.1 million extra paid-for products," crowed chief executive Jeremy Darroch. That's the highest customer growth in the UK and Ireland for ten years.

"We're excited about 2016 and we start the year with good momentum. With an outstanding set of new initiatives and products for our customers, we are well positioned to deliver further strong growth and returns for shareholders."

At 1,065p, Sky shares are up 2.5% Friday, yet still trade on reasonable valuation multiples. On Numis forecasts for full-year pre-tax profit of £1.34 billion and EPS of 62p, Sky trades on 17.2 times forward earnings.

Higher Premier League football costs keep estimates flat for 2017 before Sky Europe savings generate EPS of 72p in 2018, dropping the price/earnings (PE) ratio to 14.8 times. 'Add' says analyst Paul Richards, repeating his 1,250p price target.

Shore Capital's media analyst Roddy Davidson likes Sky, too.

"[We] view Sky's current valuation (FY2016E PE and [dividend yield] ratios of 16.4x and 3.4% respectively) as c.14% below fair value, following a 4% decline since we initiated coverage on 15 January. We have therefore decided to upgrade our recommendation from 'hold' to 'buy'."

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