Dishing It Out

BSkyB: BSkyB should be able to extract a 30 per cent rise in Rupert Murdoch's offer for the UK satellite broadcaster if the media mogul gets clearance for a deal.

Murdoch’s News Corp is understandably reluctant to pay too full a price for BSkyB. Synergies are limited, and its existing 39 per cent stake ensures there will be no competing bidders. But the balance of power has evened out since the two sides started talking 12 months ago.

News Corp’s initial 700 pence a share approach was pitched at a 22 per cent premium to BSkyB’s undisturbed value. Back then, BSkyB demanded at least another pound per share. The stock is now trading at just under 830 pence, seemingly pricing in an approximately 70 per cent chance of a deal at over 900 pence.

Assuming the UK government gives News Corp the green light, a raise is easy to justify. For starters, the market has risen. Secondly, there is a convenient pretext for adding the sweetener that is customary in bid situations: BSkyB has passed an inflexion point, with a sharp increase in free cash flow in the nine months to March. Adjust the initial approach for the performance of the UK media sector and add a measly 5 per cent kicker and that implies an offer of roughly 900 pence a share.

A pitch at this level would value the free float at £9.5 billion. That would include a 31 per cent premium over BSkyB's adjusted undisturbed value, worth £2.2 billion. News Corp says this deal isn't driven by synergies, so it’s hard to know whether the long-term value creation would exceed that. But such an offer wouldn’t look terribly undisciplined: average cash premiums in media deals have been 29 per cent since 2006, Thomson Reuters data shows.

Moreover, the politicised backdrop here, as a phone-hacking scandal swirls at Murdoch’s flagship tabloid, gives special value to a recommendation from BSkyB's independent directors. A hostile bid is theoretically possible, but would be considerably trickier for News Corp. True, if clearance comes, neither BSkyB nor News Corp will want to squander the chance of a deal. But BSkyB has the option of a standalone future. And News Corp will be especially concerned that government might prove more obstructive in future.

Some BSkyB investors are demanding at least 950 pence a share. That looks a tad optimistic. But it should be possible, and would be reasonable, to nudge Murdoch to above 900 pence.