No, not the football, although a few of those Premiership fixtures  have potential to entertain, especially where it’s big names against newly promoted. What I’m focused on is tomorrow’s auction for Sky after the UK Takeover Panel forced 39% owner Fox (+Disney*) and rival Comcast into a sealed-bids Saturday auction for the UK-listed broadcaster.

We’re used to exciting M&A on the UK Index (remember GKN/Melrose?) but an actual auction is far from standard procedure. After a long, almost 2yr battle, however, the UK M&A regulator has been forced to put an end to a protracted transatlantic affair. Why? Because neither Fox nor Comcast have tabled final bids for Sky, and we have less than 2 weeks to go before an already much extended offer period expires.

Now I think of it, why not televise this? Pay per view for traders? It’d make cracking viewing. Imagine the suspense.

Current situation

The latest Sky bid from 21st Century Fox/Disney* is 1400p/share (£24bn) while Comcast recently upped its bid to 1475p/share (£25bn). Fox kicked off proceedings back in Dec 2016, offering 1075p/share, while Comcast gate-crashed the party saying it was considering a 1250p bid in Feb of this year, and which it confirmed in April. Fox raised its bid to 1400p in July, only to be trumped by Comcast with 1475p later that day.

Importantly, Sky shares trade at 1580p, 7% above the highest offer price, suggesting investors are confident that we will see even higher bids tomorrow. In fact the shares have been above Comcast’s 1475p July offer for a whole 3 months! The shares have more than doubled since Rupert Murdoch’s Fox first approach.

What happens tomorrow?

To ensure a competitive auction, that benefits shareholders who have had to be very patient, there will be up to three rounds of bidding, with both Fox/Disney and Comcast able to table up to two new bids each. All in a matter of a few hours, with the result known by tomorrow evening (after the football). A statement on the final bids is expected Saturday evening, with the winner confirmed by 7am on Monday before markets open.

• Round 1: Only the lowest bidder (Fox#) can increase its current bid (1400p).
  • If Fox doesn’t at least match Comcast’s current 1475p, Comcast wins.
• Round 2: Only the other party (Comcast#) can increase its bid.
  • If Comcast doesn’t at least match any improved R1 bid from Fox, Fox’s R1 improved bid wins.
  • If Comcast betters Fox’s improved R1 bid, the process moves to R3.
  • If Fox only matches Comcast’s 1475p bid in R1 and Comcast holds firm in R2, the process moves to R3.
• Round 3: Fox and Comcast both make best and final offers. Sealed bids.
  • As it stands, the winning bid will have to be higher than Comcast’s current 1475p.

The question on everybody’s mind, however, is whether the winning bid will be significantly higher than Comcast’s current 1475p? Will it be above the current 1580p share price? Or will it be somewhere in between?

A complicated media love-triangle

Remember Fox already owns 39% of Sky (it is bidding to take full control), so it kind-of wins if Comcast bids more than its current 1475p as it maximises the value of Murdoch’s stake, boosting the Fox valuation and how much he and Fox (o/w he owns 17%) will net for the stake. So Fox could look to force up the price by out-bidding Comcast current offer.

*That said, with Disney having agreed (Dec 2017) to a $45bn purchase of the majority of Fox, including Fox’s 39% stake in Sky, the higher that Fox pushes up the price, the more it forces Disney to pay indirectly. Annoying for Disney which has already been told by UK regulators that its acquisition of most of Fox means it must match/honour whatever Fox is offering to take full control of Sky.

Also, if Fox wins, with a higher bid it will have paid significantly more than originally planned, for full ownership of something it already controls, and which it is ultimately selling to Disney. Complicated. Neither Murdoch nor Fox will want to overpay. At the same, they won’t want the $45bn deal with Disney (of which Sky is a big part, and Disney has to offer the same as Fox) to collapse either.

Could anything change overnight?#

Bids can still be placed between 5pm today and when the auction officially starts tomorrow (time unknown). This could change the order of who has the opportunity to up their bid first. Could this change the order of proceedings as its stands? Might it influence how high bids go?

Will the shares open higher or lower on Monday morning, in reaction to Saturday’s result?

For now, it all depends on how high Fox and Comcast dare bid, to be certain they can beat the other party and secure control of Sky. At the same time, how low do they dare bid in an effort to both avoid overpaying whilst successfully second-guessing and bettering the other’s bid? Game Theory/Prisoner’s Dilemma of the highest order.

Whatever the outcome the shares are almost certain to move (potentially quite significantly) on Monday morning once the result is made known at 7am. To be sure you receive our full assessment of Super Saturday, get access to our award-winning research now.

Mike van Dulken, Head of Research, 21 Sept 2018