Elliott or Mickey Mouse? The Takeover Cops Decide

(Bloomberg Opinion) -- Elliott Management Corp. picks so many fights that it is bound to lose some. Defeat in the activist fund’s battle with British takeover regulators has at least lifted the lid on how the U.K. regime actually functions.

The ruckus centers on Walt Disney Co.’s recent bids for Twenty-First Century Fox Inc.’s entertainment assets, among them its 39 percent stake in U.K. satellite broadcaster Sky Plc. The Takeover Panel rightly says that by virtue of buying Fox, Disney will get de facto control of Sky. So it should offer to buy out all Sky’s other shareholders at the same price Fox gets for its holding if the deal completes.

The snag is that the price at which Disney would secure its Sky shares as part of the overall bundle is open to question. The Panel puts it at 14 pounds a share. Elliott, some other Sky shareholders, and the media group’s independent directors have unsuccessfully argued that this is too low.

Elliott or Mickey Mouse? The Takeover Cops Decide

The Panel’s reasoning, released late Wednesday, reinforces the impression that the U.K. rules favor company A when it is buying B to secure control of its subsidiary C. Other shareholders in C then don’t get fully compensated for the change of control.

Many of Elliott and friends’ arguments are intellectually persuasive. Disney made an initial bid for Fox’s assets in December. The Panel quickly set Disney’s so-called chain bid for Sky at 10.75 pounds a share, the same price Fox had separately offered to pay for full ownership of Sky. Elliott says this was too low. After all, Fox’s offer for Sky was merely for incremental control, whereas Disney would go from zero to a dominant holding.

In June, Disney raised its offer for the Fox assets by 36 percent. Even if you accept the original mandatory bid level, that increase would imply a second chain bid of 14.59 pounds a share. How could the value of Sky to Disney increase by less than the overall bid, especially given the British broadcaster secured a great deal for U.K. soccer rights in the meantime?

Elliott reckons the second chain bid should be at more than 15 pounds a share, beating the 14.75 pounds tabled by Comcast Corp.

You’re being too clever by half, is essentially the Panel’s response. The second chain offer cannot be derived from the first — there are too many variables. What’s more, Disney’s sweetened offer for the Fox bundle didn’t have to value Sky more highly. The other explanation, as Disney advanced, is it was able to increase the bid by giving up some of the cost and revenue synergies of the deal.

All that counts is the hard evidence of how Disney actually valued Sky. First time around, Fox told Disney that Sky was worth 10.75 pounds, and Disney put that number in the investor presentation accompanying for the Fox assets transaction. End of story. Second time round, the evidence was thin, the Panel reckons. Then Fox made a revised bid for Sky at 14 pounds a share in July, with Disney’s backing, and the Panel felt it had something firm to go on.

It’s rare to see the U.K. bid police being so precise and legalistic. If another chain bid ever happens, forget logic and financial theory. The determinant will be what the bidder at the top of the chain is thinking. And it probably has most control over demonstrating that — just expect Elliott to go all the way to argue otherwise.

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

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

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