Tuesday, July 12, 2011

Ignore the media storm. BSkyB's a steal.

It's has to count as a heartening week for democracy and for standards in public life when some (very) bad journalistic practices brought a global empire to its knees. Although bringing NewsCorp to book over the phone-hacking allegations should have happened years ago, it shows yet again why public companies should value their reputation for integrity as their most prized asset.

But as an investor I have been almost as interested in the sideshow surrounding NewsCorp's bid for the 61% of BSkyB they don't currently own. Just to recap they offered 700p a share for the company in June last year; the bid was delayed as it had to clear various regulatory hurdles. In the interim the share price rose to around 850p as the market expected Murdoch would have to pay 900p or more for the big prize.

Now, just as the finishing line was in view, the whole bid is off and may not be revived. The arbitrage specialists who had bid up the share price in anticipation of a quick killing have fled to nurse their losses and the share price is now 705p (BSY:LSE) having gone as low as 660p. Shades of the BP gulf spill and another blue chip share meltdown but this is completely different and a great buying opportunity.

For one thing the BP spill seriously undermined the fundamental value of the company, plaguing it with uncertainty, eating up cash and forcing it to cancel the dividend and sell prize assets. B Sky B may suffer a temporary "guilt by association" reputational knock but its core business is not affected. And what a core business...

Murdoch did not scheme and plan for years to get the bid through for sentimental reasons. He knows the company is superbly well -placed to capitalise on its position as the UK's leading broadcaster. A lot of the hard work has already been done - winning 10 million paying subscribers and investing in its technology, programming and new products. There cannot be a more consistently successful large corporate innovator in the UK. Goldman Sachs agrees that this already profitable company is about to enter a phase of improved cashflow and improved earnings: Goldman rates BSkyB a buy.

There are risks. Some have speculated that News Corp may have to sell even its 39% stake but I find that alarmist. Also the pre-scandal price took account of cost-cutting synergies between Sky and NewsCorp. Longer term there may be a threat to Sky's business model from internet piracy as I discussed recently here We're going to pay for all this free stuff. But the strengths are too numerous to ignore.

The company already yields 3% and trades around 14 times earnings which is very low for a company in this sector, with next to no debt and considerable competitive advantages. What is more, as this article explains, there is the potential for the end of the bid to result in the board of BSB making a huge special dividend to shareholders of up to 20% of the current market value: BSkyB investors expect special dividend if NewsCorp bid fails. Buyers will soon be circling again and the share price is likely to rise in the short and long term.

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