Is the sky the limit for BSkyB’s shares?

Now that the UK Government has cleared the way for News Corp (NASDAQ:NWSA) to fully own British Sky Broadcasting (LON:BSY), minus Sky News, there are then two obvious questions. What price will they have to pay for BSkyB and which fund managers will have the final say? The Sunday press distilled the answers down to 850p-900p and Fidelity, Odey and Taconic amongst others. We look at an anonymous but wide pool of investor sentiment which reveals two themes: that many institutional fund managers have already left the BSkyB share register and that very few are currently betting that a takeover will not happen. By way of comparison, we look at Virgin Media (NASDAQ:VMED).

First up, the proportion of BskyB held by institutional owners in securities lending programs has hit a three year low. It remained flat at around 270m shares from the moment the bid came through until late November. Then, this community of long only funds sold 20m shares before Christmas and have since sold another 10m so that the figure stands today at 234m or 13.36% of the shares outstanding or 22% of the free float. The quantity of BSkyB’s ADR shares in lending pools has also reduced.

This suggests funds who lend their shares (directly or via Custodians) have sold their BskyB holdings to funds who don’t. This is a very normal post takeover announcement trend when people “vote with their feet”. As in this case, those who own the shares and think the original offer (700p) is fair, walk away as the share price neared or matched the offer price. They are replaced by those who take the risk that the final offer will be higher if they sit patiently on the register and agitate for a better bid. This latter group are, typically, hedge funds pursuing Risk Arbitrage and we read that Taconic are in that number with a 1.18% stake, according to the Sunday Telegraph.

In effect, we can see that shares worth 2% of BSkyB were sold by funds who, with the benefit of hindsight, incorrectly predicted that News Corp’s takeover would not be much higher than 700p. They could still be right if Rupert Murdoch walks away but this is not predicted to be very likely given how patient he has been so far in getting regulatory approval. Also, short selling is very low, at this stage, meaning no one is betting the deal will collapse.

When Kraft (NYSE:KFT) made a bid for Cadbury’s, the funds who lend stayed put! On that occasion, the traditional fund management lobby decided to agitate for a higher bid themselves – successfully as it turns out – and the Cadbury’s shares in lending programs actually increased in the months following the initial offer. The reason for the differing behavior must lie with a degree of skepticism that the Government would approve the deal and permit the concentration of media ownership.

But, will News Corp be allowed by its shareholders to bid over 700p per share? Unlike BSkyB, Murdoch’s parent company has a very un-concentrated share holder register with no one fund owning more than 8.28% according to the latest public filings. This firm is Dodge & Cox so they, along with many of the usual fund management titans, will have a say as to the upper limit of the bid price. Short interest in News Corp is low and was falling, but did rise last autumn by 300% from 0.4% to 1.4%.

Are the institutional owners selling News Corp, fearing they will over pay for BSkyB? The answer is not really, with 25% held by these long only funds, which is similar to what it was a year ago.
In summary, we can observe that BSkyB’s share register clearly now contains more than its fair share of funds who are there with the single reason to press for the highest possible price. If a bid at today’s price of 833p seals the deal this will value each Sky subscriber at GBP 1,446.

Meanwhile, what of Virgin Media which has over two times fewer subscribers? Analysts are all upgrading their forecasts for Virgin Media and, at today’s valuation, each of their account holders would be acquired for GBP 1,129 by comparison. Short interest has fallen from 10% to 6% of total shares outstanding on loan in the last three months, as the company reduces its debt and leverages its superior cable internet speed.

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