Jefferies says Sky is undervalued with or without £11.7bn Fox merger

Jefferies has upgraded Sky to ‘buy’ from ‘hold’ and hiked its price target to 1,200p from 1,050p as it believes the broadcaster is “materially” undervalued with or without the potential £11.7bn merger with Fox.

Sky is currently trading between 9-10% below the Fox offer recommended last December, and while this suggests there would be a risk of the deal failing, Jefferies believes that UK approval prospects are favourable.

The broker said this supports its new 1,200p target price and suggests that shareholders could hold out for a better offer.

Ofcom's wholesale local access consultation proposed tough charge controls on BT’s Openreach, creating a potential £130-140m saving for Sky by 2020/21. Narrowing costs of wholesale access to fibre and digital subscriber line will also enable Sky to re-focus on converting TV homes to triple play.

Meanwhile, the broker said that free cash flow downgrades at BT leaves it more dependent on raising retail prices, which should benefit Sky.

Jefferies is confident that the deal will be approved by the government without remedies or referral to the Competition and Markets Authority as it does not detect appetite among competitors, Ofcom or the government to override precedents.

It said that previous public interest reviews have established four core principles: that news is the sole genre of importance in assessing plurality, plurality was sufficient after Sky acquired a 17.9% stake in ITV, there is clear distinction in scope for coordinating editorial control between instances where assets are under common ownership and common control due to material influence, and that significance can be attached to safeguards from assets being held in separate public companies with independent shareholders.

Ofcom’s report on the deal has been pushed back to 20 June due to the 8 June general election, after the government said the 16 May deadline was too close to polling day.

Culture Secretary Karen Bradley has also asked the CMA to report on potential jurisdictional issues related the deal, which was cleared by the European Commission earlier this month.

Shares in Sky were up 0.18% to 984.26p at 0852 BST.