Sky's limits

BSkyB: The crisis engulfing News Corp is pulling shares in British Sky Broadcasting in two ways. The US media group will now find it harder to get approval to buy the 61 per cent of the satellite broadcaster it doesn’t already own. That’s dragging BSkyB shares down. But if a takeover does happen, it’s likely to be at a higher price.

Before the phone hacking scandal, the BSkyB offer was expected at around 900 pence a share, valuing the buyout at £9.54 billion. The balance of power in any negotiations between News Corp and BSkyB’s independent directors looked roughly even. The scandal now gives BSkyB’s independent directors the upper hand. With his UK newspaper business in crisis, and having sacrificed one of his most lucrative titles, Rupert Murdoch can ill afford to fail in his quest for full ownership of BSkyB.

A small handful of BSkyB investors were already demanding for an offer at well over 900 pence a share. Say that has risen to 950 pence a share. By the day, it looks ever harder for News Corp to launch a hostile bid if no agreement can be reached. So, the value of a recommendation from BSkyB’s independent directors has risen.

But the chances of a deal happening have fallen, too. The existing process for regulatory approval was in the last stages of consultation. A last- minute deluge of submissions has allowed the UK government to delay a final decision until the autumn.

The ongoing scandal does not affect the criteria for government approval, which is based solely on whether the takeover would reduce media plurality in the UK. However, the delay means new allegations may emerge, or unforeseen political obstacles may be thrown in News Corp’s path. These could give the UK’s broadcast regulator, Ofcom, reason to challenge News Corp’s fitness to own BSkyB - either in full or in part.

BSkyB’s share price, currently 806 pence, can be seen as the weighted average of these two outcomes. If there is no deal, the shares would fall to no lower than 726 pence -- that's where they would be assuming they had just tracked the FTSE-350 Media Index absent News Corp's interest. Assume a bid at 950 pence a share and that implies investors currently see only a 35 per cent chance of success.