An actor dressed as the character Mickey Mouse dances during a performance at the Walt Disney Co. Magic Kingdom park in Orlando, Florida, U.S. (Photographer: David Ryder/Bloomberg)

Mickey Mouse Wriggles Out of His Takeover Chains

(Bloomberg Opinion) -- A tiny subsection in the U.K. takeover code has shot from the margins to the center. On Friday, the Takeover Panel prompted more controversy over an arcane rule and its application to the battle for Sky Plc.

The rule book's so-called chain principle determines what happens if a bidder takes control of a publicly traded company by buying a firm that owns a dominant stake in the business, rather than buying the stake directly. That could happen at Sky.

Walt Disney Co. would acquire a 39 percent holding in the British satellite broadcaster because of its deal to buy the entertainment assets of Rupert Murdoch's Twenty-First Century Fox Inc. The thinking is that Disney's offer for the Fox package includes a bid for the Sky stake — one that all Sky shareholders deserve, not just those of Fox.

Mickey Mouse Wriggles Out of His Takeover Chains

In April, the panel said Disney should pay 10.75 pounds a share for Sky if the Fox takeover proceeds. This matched the price of Fox's first offer for the U.K. firm, which was still going through the regulatory approval process when Disney and Fox got together in December.

On Friday, the panel upped that mandatory price to 14 pounds a share in recognition of the fact that Disney had since lifted its offer for the Fox assets, and implicitly its offer for the Sky shares in the bundle.

The snag is that this increase is less than the 36 percent uplift in Disney's offer for the Fox assets. A like-for-like raise would have pegged the offer at 14.59 pounds.

Who cares? Comcast Corp. has already made a separate 14.75 pounds-a-share offer.

But the ruling sets a precedent in a situation where the chain principle is likely to be critical again.

We know now for sure that jumps between chain bids need not be linear. The panel appears to setting bid prices for the company at the end of the chain on a case-by-case basis, largely focusing on internal materials presented by the bidders and their advisers. This surely gives acquirers an advantage is framing the argument: It's hard for someone else to claim persuasively that a bidder's thinking wasn't what it said it was.

Sky is appealing, with reason. If Disney's valuation of the Sky stake went up 30 percent, then its valuation of the rest of the package has to have risen by roughly 40 percent to fit with the overall 36 percent bump.

Disney has cited U.S. tax reform as one reason for the sweetened bid. But markets had arguably anticipated much of this when the company agreed the first Fox deal late last year. What wasn't expected was February's benign soccer rights auction that has boosted Sky's valuation. On that view, the sweetener should have been weighted to Sky. Making the case successfully could be difficult.

It's hard to see a more formulaic way of applying the chain principle. Fortunately, the need to use it comes around once in a blue moon.

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