BSkyB Must Pay Premium on Sky Deutschland Shares, Investor Says

Jul 23, 2014 8:19 am ET

July 23 (Bloomberg) -- British Sky Broadcasting Group Plc must pay more than Sky Deutschland AG’s market price to reflect growth prospects if it wants minority owners to tender stock, one of the German pay-TV company’s largest investors said.

“When they make a takeover bid, they should pay for some of the future opportunity,” said Cato Stonex, a fund manager at Taube Hodson Stonex Partners LLP, which ranks among Sky Deutschland’s top five shareholders. “What it won’t be is today’s share price. There’s very little they can do to force us to do anything, they have to persuade us.”

BSkyB said May 12 that it’s considering bidding for 21st Century Fox Inc.’s wholly-owned Sky Italia unit and its 57 percent stake in Sky Deutschland, adding that it doesn’t plan to pay a premium in a mandatory offer to existing shareholders. Fox, controlled by Rupert Murdoch, and London-based BSkyB, also part-owned by the billionaire, may reach an agreement in the next two weeks, people familiar with the talks said on July 20.

Murdoch plans to use the proceeds from a sale of the Sky assets, which may be valued at 10 billion euros ($13.5 billion), to help finance an offer for Time Warner Inc., the people said.

Sky Deutschland, based in the Munich suburb of Unterfoehring, will probably double its customer count, which was 3.7 million at the end of March, over the next five to 10 years, Stonex said by phone. It may eventually reach 13 million to 15 million subscribers as consumers in Germany, whose population exceeds those of the U.K. or Italy, become increasingly willing to spend on quality programs, Stonex said.

Stock Price

The current share price doesn’t reflect the likelihood of customer growth, he said. Sky Deutschland traded at 6.61 euros as of 2:15 p.m. in Frankfurt, down 17 percent from the end of last year.

Odey Asset Management LLP, another minority shareholder, will probably also require a premium to trade in its stock in Sky Deutschland, Stonex said. Orlando Montagu, a partner at Odey, said by e-mail that the London-based company doesn’t comment on individual investments.

Stonex said he supports a merger between BSkyB, Sky Deutschland and Sky Italia as a joint pay-TV empire could more cheaply acquire rights for series and movies, purchase technology and reap other benefits from serving a market exceeding 200 million people. THS, also an investor in BSkyB, has been a long-term shareholder in Sky Deutschland and plans to remain an owner whether the German company remains independent or is part of a merger, Stonex said.

Becoming Profitable

Buying out Sky Deutschland’s minority shareholders would let BSkyB simplify its corporate structure and give it access to the full cash flow as the German operator moves toward profitability. Sky Deutschland last year posted positive earnings before interest, taxes, depreciation and amortization for the first time since 2007.

Remaining minority shareholders in German cable operator Kabel Deutschland, including Elliott Management Corp., have demanded Vodafone Group Plc pay more than twice the latest share price if it wants to squeeze them out. Vodafone bought Kabel Deutschland last year to blend its wireless business with fixed- line offerings.

An eventual takeover of a European Sky by telecommunications-network owners such as Vodafone or billionaire John Malone’s Liberty Global Plc may take place, but it will be difficult to create value from such a deal, Stonex said.

“It’s quite complicated being a pay-TV operator,” as “it requires building up skills and figuring out how much you should pay for sporting rights and movies,” he said. “It’s not something you can just buy and do overnight.”