Sky shares keep market guessing

By PAUL PANCKHURST

As Fairfax's $1.19 billion purchase of INL's newspaper assets presses on, sharemarket analysts' favourite game is called: "How will INL shareholders get their hands on the money?"

It's a game that gets more complicated as the share price of Sky, the pay-TV operator majority-owned by INL, keeps rising.

Sky shares have gained about 20 per cent since the INL deal was announced last month. They closed yesterday up 4c at $4.41.

Once the Fairfax deal is done, INL will have two assets: a big pot of cash - one estimate is $820 million - and a 66 per cent shareholding in Sky. If INL and Sky Television both stayed listed, the sharemarket would have two versions of the same asset, with INL effectively "Sky in drag" or "Sky plus cash".

On Monday, Fairfax said it would press on with the purchase despite the Government's decision to prevent a planned tax side-deal involving the INL newspaper mastheads.

Sharemarket analysts and minority shareholders in INL and Sky are speculating on the shape of the mopping-up exercise likely to follow the deal.

A research report from First NZ Capital estimates the company could find tax-efficient ways to return $540 million to shareholders, using devices such as a fully-imputed dividend and a return of capital. The next step could be a bid to take out the Sky minority shareholders - using either cash or INL shares, probably shares - and to merge the companies into one.

However, the Sky share price has risen strongly in the past week because of factors including last week's earnings upgrade. That raises the question: how much should INL pay to take out the minority shareholders?

"As the price goes up, it gets more and more difficult," said one analyst.

Another questioned why INL would pay a significant premium to take out the minority shareholders of a company it already controlled.

Mixed into the talk of possible merger permutations - another idea is a reverse takeover of INL by Sky - is the issue of how the main shareholders in Sky, News Corporation, Telecom and Todd Corporation, would view altered levels of shareholdings.

In one scenario in the First NZ report, a post-merger Sky would be owned 30 per cent by News (down from 45 per cent), 18 per cent by Telecom (9 per cent) and 10 per cent by Todd (15 per cent).

John Norling is an analyst with Alliance Capital Management, which is a shareholder in both INL and Sky. He said News - the key driver in this scenario - had no need to move quickly. If a merger looked pricey, the two companies - Sky and "Sky plus cash" - could stay separate indefinitely.

"It's untidy. But does that ever bother News Corp? I don't think so."