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What Disney-Fox Deal Means for Sky TV's Takeover

(Bloomberg Gadfly) -- Walt Disney Co.'s $52 billion deal with Twenty-First Century Fox Inc. should put Sky Plc's board on alert. The U.K. satellite broadcaster needs to be ready to fight for a better offer than the 11.7 billion-pound ($16 billion) bid Fox made last year.

The situation is highly unusual. On Thursday, Rupert Murdoch's Fox agreed to sell most of its business to Disney. So having made a takeover bid for Sky, Murdoch is now breaking up his film and television empire before the first acquisition is completed.

The Disney-Fox deal won't void Fox's obligation to press on with its Sky offer, should U.K. regulators approve the takeover. They are due to rule in March, long before the Disney-Fox deal would complete.

But Disney's intervention does create alternative scenarios that Sky's deputy chairman, Martin Gilbert, must weigh carefully.

Suppose Fox's offer for Sky wins clearance from regulators. Investors then have a bird in the hand -- a firm offer worth 1,075 pence a share. There is one scenario, albeit highly conditional, where that would no longer look so attractive.

What Disney-Fox Deal Means for Sky TV's Takeover

If the Fox-Sky deal failed, whether through investor or trustbuster opposition, Sky shareholders might get a second chance at a sale to Disney. That's because the U.S. entertainment giant stands to inherit Fox's existing 39 percent stake in Sky. U.K. takeover rules mean Disney might have to make an offer to Sky's independent shareholders.

This forced-bid scenario is by no means certain. The most likely trigger would be if British M&A regulators judged that a "significant purpose" of buying Fox was for Disney to control Sky. Disney could argue otherwise. It has already told the takeover authority that it doesn't think the mandatory bid applies. That said, the fact that it is buying Fox in anticipation of its target taking full ownership of Sky hardly helps its case.

If a bid were mandated, it wouldn't happen until Disney's deal with Fox was completed. That's a long way off. The price then is hard to foresee. The rules say Disney would have to offer at least what it paid for the Sky shares it acquired through the takeover of Fox. What would that be? The market price of Sky's shares at the time deal closed? Or would there be an adjustment to allow for the premium Disney paid for the overall Fox business? There's plenty of work here for bankers and lawyers.

This would be a prickly situation for Disney. It would be made worse by the fact that any offer would face regulatory hurdles. U.K. takeover rules allow mandatory bids to be halted if the Competition and Markets Authority or European Commission investigate. The rulebook doesn't anticipate intervention by industry watchdogs like broadcast regulator Ofcom, which would have a say here. 

Disney might want to pre-empt this mess by launching a voluntary offer. Assuming it faces fewer regulatory hurdles than Fox in buying Sky, perhaps it could try to complete a deal on its own terms before any mandatory bid obligation arose from buying Fox.

What does all this mean for Gilbert, whose other job is co-running asset manager Standard Life Aberdeen Plc?

A first step should be to establish quickly if the Disney offer -- itself subject to regulatory uncertainty -- creates an obligation for a Sky bid, and how the price might be determined. It's a long shot, but if it does, and the price is higher, sticking with his current recommendation of Fox's offer is hard to defend.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

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