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BSkyB will thrive on its own if NewsCorp takeover folds says RBS

Published: 19:55 12 Jul 2011 AEST

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Investors in BSkyB (LON:BSY) need to switch their focus back to the fundamentals of the company now that the NewsCorp merger looks increasingly unlikely to succeed in the near term, according to analysts at Royal Bank of Scotland.

The group’s shares have shed over 150p, about 18 percent, from 845 to 693p in the past week. But in a note to clients RBS repeated a ‘buy’ recommendation, but cut its price target from 900 to 830p as it removed the anticipated NewsCorp synergies from the valuation.

RBS analysts Paul Goode and William Mairs reckon Sky is well-placed to thrive despite the tough UK consumer environment.

The analysts are forecasting 8 percent revenue growth in 2011/12, despite a one year freeze in subscription prices from September 2011.

They add that the rising penetration of high definition subscriptions, broadband and telephone services will continue to drive increasing average revenue per unit, albeit at a slower pace than last year.

Furthermore RBS reckon Sky’s customer base will continue to grow, with analysts expecting subscribers to hit the 10.5 million mark by June 2012. 

Looking at the NewsCorp deal Goode and Mairs believe that NewsCorp chief executive Rupert Murdoch has bought more time in an attempt to ride out the bad press relating to the phone tapping scandal that’s rocked the group’s wholly-owned News International business. 

The highly publicised scandal has cast a shadow over News International for some time. And what began as a dispute over celebrities’ right to privacy reached a dramatic tipping point last week as fresh allegations ultimately brought down The News of the World newspaper.

Last week a group of major advertisers abandoned the newspaper after allegations that the newspaper hired private investigators to hack into the phones of high profile individuals and victims of serious crimes. 

The public outcry - and the financial threat from severely reduced advertising revenues and dwindling circulation - that followed led to News Internationals decision to scrap the newspaper, which had been in circulation for 168 years.

The fallout from the scandal now threatens to de-rail NewsCorp’s deal to buy-out the remaining BSkyB shares that it does not already own - NewsCorp already owns 39 percent of the company. 

Prior to the scandal the deal had the backing of the British Government. Earlier this year Murdoch’s NewsCorp tried to appease concerns that the enlarged firm would be too dominant in the British media, by committing to sell off the Sky News television unit. 

However a u-turn on this decision yesterday means the deal will now be delayed while the UK’s competition regulator assesses the deal.

“The referral to the Competition Commission kicks NewsCorp's BSkyB bid into medium term,” the RBS analysts said.  

"NewsCorp manufactured a referral to the Competition Commission yesterday afternoon by withdrawing the 'undertakings in lieu' (i.e. spinning off Sky News) that it had previously offered."

The analysts added: "We believe NewsCorp has therefore engineered a delay (the CC investigation will take at least six months), presumably so that opinion cools, and perhaps with a mind to exploring an exit of UK newspapers to focus on BSkyB, NewsCorp's move keeps the approval process alive, but only just." 

Meanwhile Mathew Walker, analyst at Nomura, reckons the merger could take more than a year to get passed by both the competition commission and media regulator OFCOM. 

However the analyst doesn’t think investors should have to wait that long for a cash return, instead he reckons Sky should pay a 130p dividend to shareholders.

“BSkyB shareholders should not have to wait for another year for a cash return, in our view, and should press for one at the earliest opportunity,” Walker said in a note to clients.

“We think they should not have to wait for another 6 or 12 months or longer while the outcome of the regulatory process still has significant uncertainty."

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