Britain’s Media Secretary Matt Hancock has fired the starting gun on an M&A race for Sky. The competitors are Rupert Murdoch’s Twenty-First Century Fox, in cahoots with merger partner Walt Disney, and U.S. cable giant Comcast . Whoever finishes first, the real winners are the UK pay-TV group’s investors.

Hancock on Tuesday cleared Fox to buy the 61 percent of Sky it doesn’t already own. That bid has been bogged down in a regulatory review since December 2016 over fears it would give Chairman Murdoch, whose other company owns the Sun and Times newspapers, too much control over UK media. Hancock said selling Sky’s news channel to Disney, which is buying other Fox assets in a $52.4 billion all-stock deal, would alleviate concerns.

Complicating Fox and Disney’s cosy arrangement is Comcast, which leapt in with a higher 22 billion pound ($29 billion) offer for Sky while Murdoch was waiting for UK regulators and courting Disney. The U.S. cable group’s boss Brian Roberts also has his eyes on Fox’s American assets like movie studios and cable networks which Murdoch is selling to Disney, and may soon launch a separate bid to prize them away from the House of Mouse.

Sky is effectively the first lap in the race for Fox’s portfolio of media businesses. As things stands, Comcast’s 12.50 pounds per share offer would win it control of the British pay-TV group called Fox’s “crown jewel” by Disney boss Bob Iger. But Murdoch and Iger can put their noses ahead by beating Roberts’ bid. The fact that Fox already owns 39 percent gives them an advantage: for every 1 pound Comcast would have to pay for all of Sky, they’d need 61 pence. At, say, a 20 percent bump over Comcast’s current price Fox would have to pay 16.1 billion pounds. Buying all the shares would cost 26.4 billion pounds.

That’s steep. Add net debt, as forecast by analysts, and the enterprise value would be 33.1 billion pounds, or 14.4 times 2018 EBITDA. Even adjusting for savings from a cheaper soccer-rights deal that kicks in next year, the multiple is 13.2. In the two years before Fox’s original offer, Sky traded on an average 10 times multiple according to Eikon. In other words, Hancock has granted the suitors licence to overpay.

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CONTEXT NEWS

- Britain on June 5 cleared Twenty-First Century Fox’s bid to buy the 61 percent of Sky it doesn’t own, on the condition that Sky News is sold to Walt Disney or an alternative buyer.

- Addressing Comcast's 22 billion pound bid for Sky, UK Media Secretary Matt Hancock said he would not intervene.

- Fox in December 2016 offered to buy Sky through a scheme of arrangement for 10.75 pounds per share. That bid was held up by a regulatory probe into whether the deal would give Fox Chairman Rupert Murdoch too much control over UK news.

- In December 2017, Fox agreed to a $52.4 billion stock offer from Walt Disney for its entertainment assets and international units, including its stake in Sky. Brian Roberts’ cable group Comcast in April offered to buy Sky for 12.50 pounds per share, a 16 percent premium to Fox’s offer.

- Fox said on June 5 it is confident in reaching a final decision to buy Sky.

- Sky said its independent directors were mindful of their fiduciary duties and remained focused on maximising value for Sky shareholders. The company’s shares were up 0.4 percent to 13.55 pounds at 1400 GMT.

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(Editing by George Hay and Karen Kwok)

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