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Sky TV holders swap more for less


Friday 14th November 2003

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Institutional investors tend to wait until the last moment before accepting takeover offers so they'll have the latest information before committing themselves.

But in a cash-plus-shares offer like INL's bid for Sky TV, the waiting game becomes interestingly complicated.

INL's share price has risen steadily since it unveiled the bid on August 28. The previous day it closed at $4.27, valuing its Sky offer at $4.63 a Sky share.

As Sky had traded immediately beforehand at $4.52 that seemed reasonable.

But the Deloitte independent appraisal report valued Sky at $5.03 to $5.61, with a mid-point of $5.32. Sky's independent directors therefore recommended shareholders send INL packing.

As INL's shares have risen, the gap has narrowed. At $4.90, the value of the offer has risen to $4.82.

That's still 9.4% below Deloitte's mid-point but it's a lot better than the market's $4.27.

The offer of $3.35 cash and three INL shares for each 10 Sky shares requires INL to issue shares as Sky shareholders accept. It has done so in one big lump, to Telecom, and in dribs and drabs since.

Telecom, of course, has had the benefit of the INL price rise. On the face of it, it makes no difference to Sky's remaining shareholders whether they accept now or hang on until the December 5 deadline ­ they will still get three INL shares and $33.50 for every 10 Skys.

But for diehard Sky believers the rising INL price isn't good news.

INL now has only its Sky shares and cash so it has essentially become Sky by proxy. It has said it will return excess cash to shareholders so those holders will be in the same position as Sky holders are now ­ at least in the sense they will have economic exposure to a pay TV company and to nothing else.

For those who want to maintain that exposure but believe INL will succeed in getting 90%, the logical thing to do is to take INL's shares and cash and reinvest the cash in INL shares.

The trouble is, the higher the INL share price goes, the fewer shares the cash will buy ­ and hence the smaller the exposure to Sky.

A holder of 10 million Sky shares before the offer had a 2.57% stake in the company.

Assuming INL's offer succeeds, the fully diluted number of shares on issue will be 463.2 million. A Sky holder accepting when the share price was $4.27 at the time of the offer would have got three million INL shares and would have been able to use his $33.5 million cash to buy a further 7.8 million shares.

The 10.8 million shares would have been a 2.33% INL stake.

At $4.90 the cash will buy only 6.8 million additional INL's for a 9.8 million share stake, or 2.11%.

Shoeshine reckons quite a few people will have worked this out and will have been using their INL cheques to buy up the shares while the going's good.

That would explain why INL's share price, in the absence of news from either company and despite the dilutionary issues of new shares, has continued to rise.

Meanwhile, the INL offer has allowed Telecom to rationalise its position and kill several birds with one stone.

The strategic rationale for holding Sky shares directly was to make sure the telco had an influence at board level. That was important because, in a converging world, a bundled pay TV and telecommunications package is a powerful marketing tool.

The INL stake, a blocking 10%, was there to ensure News would have to accommodate Telecom before it was able to take over Sky altogether.

But the amounts of money involved were weighty on a company with relatively high gearing, particularly as Sky paid no dividends.

With Sky's penetration now at 40% ­ still fairly low among developed countries ­ and key programming stitched up it's extremely unlikely any competitor will ever be able to get a decent foothold.

Telecom's sale netted $156 million with which to pay off debt and accelerate its plans to pay a higher dividend.

It retains a 12.05% INL stake (11.4% fully diluted), which gives it upside exposure to Sky and is enough to keep the Murdochs honest.

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