"We are not convinced that a deal of this magnitude will receive shareholder support," Forsyth Barr analysts Aaron Ibbotson and Matt Montgomerie said in a June 8 note.
This morning, Ibbotson told the Herald he continued to believe Sky was at risk of losing the shareholder vote - but that the immediate trigger for abandoning the deal was likely negative feedback from large institutional investors.
"There was a clear message from institutional investors that this type of deal was not what they were expecting," Ibbotson said.
A portfolio manager with an institutional investor told the Herald on June 8: "We really liked the strategy Sophie [Sky CEO Sophie Moloney] was implementing, but this muddies things."
There was also anecdotal evidence in online forums that retail investors were unhappy, Ibbotson said, plus the blunter indicator provided by Sky's falling stock (its shares fell 7.1 per cent to $2.25 on the day the deal was made public (the level where they closed on Wednesday).
And Sky could have also noted analyst feedback, Ibbotson said.
Forsyth Barr called the deal "not intuitive", Morningstar's Brian Han labelled it "puzzling", while Craigs' Mark Lister said investors were "apprehensive" and seemed to be asking if the deal was the best use of Sky's cash. They could not see synergies that could add value.
This morning, Han said he was "somewhat relieved". He was still scratching his head over "Why Sky would want to pursue a structurally-challenged, traditional media company. Radio hasn't grown for a long time. Outdoor advertising has grown, but it's a small market."
Sky reassures on dividend
While Sky's statement last night offered no specific reason for leaving the table, it did obliquely refer to investor and analyst fears that the deal was not the best use of the cash generated with Sky's recent comeback, and that it would put the return of its dividend in peril (as things stand, the profit payout is scheduled for September).
"Sky has been exploring options to return capital to shareholders and accelerate
organic investment in the business to drive further growth ... Sky remains committed to
restoring regular dividend payments," the pay-TV provider said.
'Defence 101'
Last June, Sky said in an NZX filing that it had been the subject of unsolicited offers. And there were reports last month that Sky had offered itself to two private equity firms (Sky said it would not comment on speculation). The latest rumours gave rise to the theory that the MediaWorks talks were a stalking horse, designed to spur potential private equity buyers (of Sky) into action. Morningstar's Han saw it as a possible strategic play.
"Sky is a cash-generating business with no debt and a low valuation, so it would not be surprising if private equity had a look," Ibbotson says.
"But what I think Sky should do - and probably will do - is focus on its own business and finding the best use for its cash. That might be smaller acquisitions, or they might do a special dividend or share buyback."
The profitable pay-TV provider said at its half-year result that it had $74m cash, which was later bolstered by $56m from the sale of its Mt Wellington campus. Money-losing MediaWorks, by contrast, reported total borrowings of $103m for the 12 months to December 32, 2021.
Sky says it will update on its investment strategy at its full-year results briefing in August.
Morningstar's Han said, "It's no secret that Sky could interest external parties. They've been on the radar for a few months now - and therein likes the mystery of why they would bid for MediaWorks. If you put on a cynical hat, you might say it's classical Defence 101."
Wallace: Sky approached us
Meanwhile, MediaWorks chief executive Cam Wallace has filled in a few more details on the abandoned deal.
"Sky made the initial approach," he told the Herald this morning.
"Sky approached us and as you'd expect our shareholders [private equity firms Oaktree and Quadrant] analysed their offer."
Sky made the decision to pull the plug on the deal, Wallace said. He would not comment on whether the price or any other factor caused the takeover talks to break down.
Wallace indicated the talks were collegial and could lead to some level of partnership even though the two companies will now continue as independent commercial operations.
"We had some really strong engagement with Sky, and found some areas around content where we could collaborate with them, and there are opportunities to work together," he said.
Sky chief corporate affairs officer Chris Major said, "While we are not proceeding with the transaction, we see opportunities in working together to create some of the benefits that had got us talking in the first place - including content collaboration."
Major said Sky's broader partnership approach involved deals with a number of parties, including its recently signed rugby radio commentary deal with Herald publisher NZME.
A MediaWorks IPO?
Former Air New Zealand Wallance has a 1.5 per cent stake in MediaWorks' holding company under an options deal and has a contract entitling him to 1.5 per cent of any sale above $175m - which would have put him in line for a payday of $3.83m if Sky's approach had led to a takeover.
But this morning he focused on the impact on MediaWorks. Wallace said Sky's decision not to proceed with the deal "is pretty positive for us. It gives us a bit of clarity." It had also opened doorways to content collaboration, he said.
Wallace dismissed talk that MediaWorks' owners were shopping it around, and rumours of a public listing.
"We're focusing on running the building and executing the strategy. As we sit here today, we're not looking at an IPO," Wallace said.
