UK Edition
Questor: it’s not too late to buy Sky – investors should win whether Fox's bid succeeds or not
The wheels of government are turning slowly but the £10.75p-a-share bid for Sky from 21st Century Fox looks a step closer to success after last week’s statement from Karen Bradley, the Culture Secretary.
As the shares stand below the offer price, investors may be best served by sitting tight. If the bid goes through, a further gain is coming. If the deal is delayed beyond December, Fox must pay a 10p special dividend, potentially adding to returns from a successful bid.
And if the deal fails, Sky should continue to generate the copious free cashflow that underpins a perfectly respectable yield.
The minister did not make a definitive decision last week. She will now accept final representations from all parties involved before July 14, although it seems likely that she will refer the bid to the Competition & Markets Authority.
It does appear to be in Fox’s favour that its approach has passed the “fit and proper” and “broadcasting standards” tests: had the minister and the regulator, Ofcom, rejected the approach on those grounds the Murdoch family would surely have found it hard to change their minds.
The Murdochs should find it easier to address the issue of “media plurality” and whether they exercise too much influence via their newspapers and broadcast output, partly because the internet’s ubiquity makes it difficult to argue that anyone has too much control of content these days. That suggests the bid still has every chance of receiving approval.
Questor says: buy
Ticker: SKY
Share price at close: 998p
Update: Game Digital
Shares in Game Digital plunged by a third on Friday after the video games and consoles retailer warned that earnings would undershoot expectations by a “substantial” amount.
This more than justifies our cautious analysis of the stock in March when the shares were trading at 43p. With around 2,000 firms listed in London it is hard to see why anyone would spend too much time looking at this one.
At least the company had £69m in net cash as of January, a figure that now exceeds the £40m market value, so the actual operating business is effectively thrown in for nothing.
This is a welcome contrast to the debts that led to administration in 2012 and ended the company’s previous stint on the stock market.
It is also tempting to be forgiving this time, since the problem does not seem to be demand but a shortage of supply of the new Nintendo Switch console. But this only shows how Game Digital still depends on console and game cycles, which can be very fickle, despite its efforts to generate other digital revenue streams.
The popularity of playing games on smartphones, PCs and tablets also still looks more like a threat than an opportunity.
In addition, there is a 17-year lease on the Basingstoke headquarters at a current cost of £1m a year while rent on the shop estate comes to £17m a year, although the leases look mercifully short in the latter case.
Any big cuts to earnings forecasts will put pressure on cashflow and mean dividend cover could get thin, so deeper-than-expected cuts in the payout remain a distinct risk, despite the cash pile. Forecasts of even a 2p dividend, down from 3.41p a year ago, imply a yield of almost 9pc and thus look too good to be true.
Questor says: avoid
Ticker: GMD
Share price at close: 21.75p
Update: Morrisons
The latest numbers from industry consultants Kantar Worldpanel offer grounds for optimism that Morrisons’ turnaround is on track, helped by the best industry-wide sales growth since spring 2012.
The firm generated a 3.7pc increase in revenues across the 12 weeks to June 18, outpacing Tesco, Asda and Sainsbury’s and even adding 10 basis points (0.1 of a percentage point) to market share, which rose to 10.6pc.
A market value of £5.6bn and net debt of £1.2bn by the year end combine to give an “enterprise value” of £6.8bn. Compared with property on the balance sheet of £7.2bn, the valuation looks well underpinned.
Patience will be needed but Morrisons’ strategic initiatives do seem to be paying off.
Questor says: buy
Ticker: MRW
Share price at close: 237.6p
Russ Mould is investment director at AJ Bell, the stockbroker