'Win-win' Sky deal predicted

Forsyth Barr analyst Rob Mercer is sticking with his view that Sky Network Television is likely to return between $500 million and $700 million to shareholders as part of a planned merger with former media giant INL.

Other analysts agree a payout of that size is within Sky's capabilities but, asked to pick a number, one cautioned that the company's intentions were not clear.

"The reality is, nobody knows."

Mercer first picked that range as what Sky could afford in a report issued in October.

He highlighted it in a fresh report this month and reiterated it to the Business Herald yesterday.

Investors are hungry for more news on Sky and INL's plans, announced last August.

The pay television company is expected to update the market on plans for the merger - structured around a company called "Newco" - on February 21, when it announces its six-month result.

Mercer is picking a payout of $1.28 to $1.79 per share to Sky investors, based on his calculations of how much debt the company should take on.

This takes into account forecast earnings and the requirements of rating agencies, which report on companies' financial strength.

Sky is believed to be either debt-free or nearly so.

Mercer said his expectations on the scale of the return were probably at the higher end of analysts' views.

Sky has nearly 600,000 subscribers and a market capitalisation of $2.4 billion.

It moved into the black last year with an annual bottomline profit of $35 million.

INL is Sky's biggest shareholder, with a 78.3 per cent stake.

The biggest shareholder in INL is Rupert Murdoch's News Corporation, followed by Todd Corporation and Telecom.

After the sale of its newspapers and magazines to John Fairfax Holdings in 2003 for $1.2 billion, INL was left with the Sky stake and $310 million in cash.

Sky is expected to detail a merger timetable with the February 21 result and the deal could be done by June.

The steps will include an independent valuation of Sky.

If the deal goes ahead, Newco will buy INL and Sky.

Sky and INL shareholders will get a mix of Newco shares and cash.

Newco will then be renamed Sky.

In a report on the plans, Mercer said the merger was a win-win case for INL and Sky shareholders

It was a tax-effective way for INL to distribute its cash and for Sky to gear up its balance sheet with a much higher level of debt than was possible under the existing structure.

He expected INL shareholders to get a capital return of $1.82 to $2.25 per share, made up of 75c per share for INL's capital return plus the money from the Sky return.

INL made an unsuccessful bid to buy out Sky with a mixture of cash and scrip in December 2003.