The Sky is not the limit for short sellers

The phone has been ringing off the hook today with people wanting to know if short selling is the reason why British Sky Broadcasting Plc (LSE:BSY) is seeing such a large and fast price fall. The answer is not really - at least as of last Tuesday. As the Sunday papers reported, certain fund managers were selling their holdings at the start of last week (Odey for instance), but started buying them back as the week closed. This will have driven down the share price since very few will have been buying back in this way. We will do a quick analysis of the investor sentiment here.

First the facts. According to our data, reflecting short sales up until the close of business last Tuesday, the negative sentiment from those that can short was amazingly low. I say this because the academic research points to short sellers being the fastest of all investors to interpret news. Last Monday the news broke of Scotland Yard’s investigation into News of the World’s reporters allegedly hacking into the phone of a poor murdered girl in 2002. This story was in full motion on Tuesday and has continued to swell in size ever since, with Murdoch himself arriving in London to sort out the trouble at News International.

Demand to borrow in BSY (0.5% of total shares outstanding on loan) and the ADR are both low and did not react much to the news that would clearly place strain on News Corp’s (NYSE:NWS) bid for B Sky B. Also obvious this time last week was how far above the bid BSY’s shares were trading, which implied the risk of short selling this share was very low, with the price at 844p against a bid of 700p last summer!

To some extent, the scale of short selling in BSY is hard to gauge. If a lot of hedge funds are long BSY as part of a strategy to tease more money from News Corp than their purchase price (part of a so called Risk Arb strategy), this means there are a lot of BSY shares in custody with the prime brokers. These shares can be used to cover short positions in such a way that only the bank can see these trades.

However, as we wrote on March 7th, it seems, from our data, that there are not as many hedge funds on BSY’s share register as we are led to believe. In this case, there is not as much internal covering of shorts as could be the case.

So what is driving the price fall and is it temporary? Clearly plenty of long only fund managers booked a handsome profit by selling their shares throughout last week. They had to kiss goodbye to dreams of getting, as Fidelity are reported to have wanted – 950p per share, but instead booked somewhere between 750p and 844p per share, which still represented a good profit given where they were trading prior to last year’s bid.

Crispin Odey is extremely fond of BSkyB’s business model and said last week, according to the Sunday Telegraph, that he was buying back in to this “brilliant business.” Is it so brilliant that it now looks cheap at 700p? Below are some comparable companies and their respective price to earnings ratios.

My layman’s view of this table suggests that BSY has returned to a sensible price. That said, with over 9m subscribers, the growth must be in relation to greater profit per customer and this becomes more and more challenging as people’s disposable income suffers in this environment. With no bid on the table for at least 6 months, it is back to basics and the daily struggle for organic growth.