Shareholders of Sky plc are in a win-win situation

While Culture Secretary Karen Bradley continues to contemplate the merits and faults of Twenty-First Century Fox’s proposed takeover of £17bn cap Sky (LSE: SKY), the latter released some encouraging figures to the market this morning. Despite the muted reaction, I suspect existing investors can’t lose whatever decision is made.

Return to growth

Over the last year and despite “market headwinds”, Sky saw a 10% increase in revenue to just under £13bn compared to the previous year (5% once exchange rate fluctuations are eliminated).

As expected, earnings were impacted by the sizeable costs incurred in buying the rights to show Premier League football and investment in new business, with overall operating profit falling 6% to £1.47bn. Positively, this blow was cushioned by an 8% rise in Q4 to £455m. Earnings per share also rose 19% in the most recent quarter.

In addition to launching Sky Q — its next generation TV platform — in over 1m homes in the UK, the company also reported strong demand in Germany, Austria, and Italy. Over the 2016/17 financial year, Sky welcomed 686,000 new customers, bringing the total number of people consuming its content to 22.5m.

Looking forward, CEO Jeremy Darroch revealed what he labelled as a “strong set of growth plans” for the new financial year. The company will be increasing the amount of cash it pours into Sky Originals by 25% and rolling out Sky Q to the aforementioned European markets. On top of this, the business plans to create 300 new technology roles and continue scaling up Sky Mobile which achieved “high single-digit share of sales” in June.

Everyone’s a winner

Despite the return to growth in Q4, the shares were flat as a pancake in early trading, suggesting that most market participants are more concerned with the outcome of the proposed takeover than the performance of the underlying business at the current time. Personally, I think most private investors would do well to kick back and relax.

If the deal does go through, holders will collect their 1,075p per share and move on. Although it would be decidedly unFoolish to buy shares in any company on the possibility of a takeover, doing so here would see a capital return of just over 11% — based on today’s price of 966p — if Rupert Murdoch were given the green light to proceed. 

If the deal doesn’t go ahead, I can still see Sky’s investors benefitting. Although the share price would be temporarily knocked down, the £200m break fee paid by Fox would almost certainly be returned to shareholders. What’s more, the inevitable dip in price would allow existing and prospective investors the opportunity of buying a solid business at a reduced price. This scenario is particularly attractive given that Sky’s shares already look fairly cheap, trading as they do at 15 times earnings for the 2017/18 financial year based on forecast EPS growth of 14%. Indeed, with a price-to-earnings growth (PEG) ratio of just 1.07, new investors look like they would be getting a cracking deal for their money. The predicted 3.7% yield looks safely covered even if levels of free cashflow have dwindled over the last few years due to increased investment.

There are no guarantees when it comes to investing. That said, I wouldn’t be concerned if I were a Sky shareholder, regardless of what happens next.