Credit Suisse downgrades Sky, ups price target on 21st Century deal

Credit Suisse downgraded broadcaster Sky to ‘neutral’ from ‘outperform’ but lifted its price target on the stock to 1,075p from 980p to bring it into line with the offer from 21st Century Fox.

The bank said potential upside of about 9% at some point within a 12-month time frame is insufficient to maintain an outperform rating, given regulatory risk and uncertainty, even if risk is relatively low in its view.

CS noted that Fox has indicated the proposed transaction could take up to a year to close including getting EU/UK regulatory approvals and shareholder approval via a scheme of arrangement.

Fox has reserved the right to proceed via an offer rather than a scheme and has agreed a £200m break fee. The companies have agreed that Sky will pay no dividends in 2017, but can pay dividends in 2018, including a 10p special dividend if the transaction is not closed by the end of 2017.

Credit Suisse pointed out that the deal will need EU merger clearance and could go to Phase 1 or Phase 2, although the bank reckons it is likely to gain merger clearance without major conditions given the lack of overlap in Europe between the two companies.

In addition, there could be a referral to Ofcom under the Enterprise Act 2002 by the Secretary of State for Culture, Karen Bradley, to look at issues regarding media plurality.

“Such a referral, is by no means a certainty but a decision not to refer is potentially subject to judicial review. Ofcom could also look at the issue of ‘fit and proper’ for holders of broadcasting licences under the Broadcasting Act 1990.”

At 0855 GMT, Sky shares were up 0.1% to 987.50p.