Valuation is art not science
A recent finance editorial in The Guardian on the 21st Century Fox v Comcast battle for Sky was critical of the Sky independent directors. It felt they should be embarrassed at recent events and should realise that valuation is art not science.
Paraphrasing the argument - in 2016 the independent directors felt a £10.75 per share cash offer was too good to miss. Surely offers 40% above the previous weeks share price don’t come a long too often. In fairness at that time the share price had fallen from £11 in April 2016 to 769p as the market fretted about Netflix and BT. And you can be sure that Brexit fears didn’t help either. But at the same time based on the fundamentals including the benefits to be derived from getting Sky Italia and Sky Deutschland motoring properly UBS analysts reckoned a fair price for Sky was £13.70. So they’d not have been sellers at that price.
Today in 2018, with the political and regulatory issues behind them the real bidding has begun and the action is around the £14.00 to £14.75 range - so far.
Price v Valuation
This is all about price v valuation. So what are the lessons? Well the discussions at the board are of course mostly about price. First time around in a jittery market, amidst fears about market trends (the threat from streaming), and with a one horse race the independent directors view on price wasn’t too bullish. They obviously weren’t feeling too confident. Either that the value was light, nor were they sufficiently robust to turn it down and take and flak from further share price decline afterwards. So that was all about what price to accept.
But back in 2016 UBS valuation opinion based on fundamentals was clearly suggesting something much higher – I’d be surprised if that wasn’t also the view in the Murdoch’s camp.
Now it looks so different. Better performance, better market sentiment, and true competitive bidding is driving a value c£7Bn higher than before! No wonder Sky shareholders were angry in 2016.
The above is all about how it felt for the sellers, for some insight into how it might have felt on for the purchasers have a look at this blog post on the PEM Corporate Finance website on how to pitch an acquisition offer.
The need for competition to get the best price
Taking the lesson a step further this really underscores the need to sell your business at a time of your choosing and to get a competitive process going. It also demonstrates graphically how much higher a price you might get as a result of real competitive tension between strategic buyers.