UBS reiterates 'buy' on Sky amid Fox takeover talks

UBS reiterated a ‘buy’ rating on Sky and raised the target price to 1,370p from 1,310p on Thursday after Rupert Murdoch proposed a deal to a full takeover of the broadcaster.

Murdoch’s Twenty-First Century Fox on Friday announced a preliminary deal to buy the rest of the shares in Sky it does not already own for $14bn.

The deal comes five years after a phone hacking scandal at Murdoch’s now defunct tabloid newspaper News of the World disrupted his previous attempt to buy Sky.

UBS said it believes Sky shareholders could push for a higher offer price on strong second quarter results in January 2017 showing improvement in UK key performance indicators and satisfactory outcomes for the Champions League and Series A rights auctions.

“While the independent board of directors for Sky has agreed to the offer price of 1075p, the board can change its recommendation at any time up until the formal offer documents for the extraordinary general meeting are published, typically after regulatory approval for the deal is granted,” UBS analyst Polo Tang said.

“Our view is that EPS for Sky is about to inflect after a period of heavy investment and that EPS should reach more than 100p by 2020.”

UBS raised its target price to factor in the upside from Sky’s recent launch into mobile. The bank raised its longer-term earnings before interest, tax and amortisation estimates by 2-3%.

“Near term, there is upfront investment from the launch of mobile but the bulk of these costs was already implicitly embedded into UBS estimates/consensus forecasts,” Tang said.

“At a 1075p offer price, Sky trades on 16.3x calendarised EPS for 2017E falling to 13.4x in 2018 and 11.1x in 2019.”

Shares fell 0.51% to 978.50p at 0928 GMT.