Is the NewsCorp / BSkyB deal doomed?

Alex DeGroote, media analyst at Panmure Gordon, explains the negative implications for BSkyB: “Importantly, News International is not News Corp. By exiting the NoW, News International attempts ‘to draw a line in the sand’, at least in terms of likely regulatory interference in the NewsCorp/BSkyB deal.

“However, the probability of a successful deal is now much reduced. Previously, we would have estimated a 90% plus chance of a deal getting approval, and completing in the near term. Now the probability can be no higher than 50%, and the time-line is likely to be drawn out.”

DeGroote also mentions the key regulatory issues: “DCMS Secretary Jeremy Hunt has now pushed back to September his response to the latest consultation exercise on the deal. The volume of complaints has increased significantly.

In a nutshell, the key points are:
1) Should the whole deal be referred (from scratch) to the Competition Commission?
2) Will Ofcom pursue the ‘fit and proper’ persons test against NewsCorp?

Leaving the legalities to one side, we cannot believe it makes political sense for a fragile Coalition to let this pass without thorough and fresh scrutiny.”

DeGroote added that, “prior to the deal announcement last year, BSkyB traded in the 500p-600p range. Since then, the market has gone up and, more importantly, EPS expectations have gone up materially. The company is performing well. As a 100% standalone, we think BSkyB is worth c675p (e.g 17x PER 11, falling to 14x PER 12).”

Finally, “in simple terms, the BSkyB share price should be the blended probability of the company as a standalone, and the company as a take-out play. We believe it is seriously erroneous to assume the closure of the NoW improves the probability of the NewsCorp deal getting done. We reduce our BSY target price to 730p, and expect further weakness.”