BSkyB: What should investors do with their holdings?

15th July 2011

Ian Cowie blogs in the Daily Telegraph that immediately after News Corporation withdrew its bid for the broadcaster this week, the shares traded more than a fifth down than their peak of 850p before staging a partial recovery.

As a result, hundreds of thousands of savers with pension plans and some of the best-known unit trusts in Britain will have seen the value of their funds fall, the Daily Telegraph says.

Major asset managers including Fidelity, Scottish Equitable and AEGON admit they have more than £500m invested invested in the stock, says the report.

What are investors doing to limit losses?

The Financial Times (paywall) reports that pressure is growing among BSkyB's investors for some form of payback after the collapse of News Corp's proposed bid this week. It adds that most of those contacted by the Financial Times are calling for a special dividend.

The report says that the majority of the shorter-term shareholders, most of whom bought at a price between 750p and 800p, thought that a share buy-back would be the best move by the company if it was looking to compensate shareholders for the loss of a proposed bid that would have given them a premium of at least 50p to 100p to the current share price.

krisbei comments on the blog: "As a long term investment I get the impression that this is not a bad stock to hold. It may be a terrible one to sell today, but it gives respectable dividends and could become a target for another company, which could send the price shooting up again. "

Pressure is also growing on James Murdoch to step down as chairman of BSkyB as shareholders call for him to quit in the wake of the collapsed bid, reports the Independent.

The Co-operative Asset Management, which holds shares in Sky and News Corp, followed Pirc, the corporate governance adviser, in calling for the appointment of a chairman with no ties to the failed bidder.

The Daily Telegraph reports that Alan MacDougall of Pirc called for institutional investors to act to remove Mr Murdoch: "It is time for the board to review whether BSkyB and its shareholders would benefit from a new, independent chair. And if shareholders agree it is time for reform, they should say so."

He added: "Questionable governance practices have been tolerated at BSkyB for a long time, and unfortunately many shareholders have not effectively challenged them. That must change."

However, the Murdoch family controls almost 40pc of the voting rights, making it a major force in the company's management.

What do advisers say investors should do?

Advisers say that as a long-term investment, the stock has plenty of potential to recoup any losses.

Richard Hunter, head of UK equities at Hargreaves Lansdown says: "The withdrawal of the News Corp bid has certainly, for the moment, taken the wind out of the sails for the Sky share price. From a previous high of around 850p, with speculation intensifying that the company was holding out for 900p, the shares have fallen sharply – on Thursday standing at the initial bid approach of 700p per share.

"There is already a feeling that the withdrawal is for politically expedient purposes and that, at some point, News Corp will return to purchase the 60% of Sky it does not currently own. Meanwhile, Sky itself continues to power ahead, long since having passed its own target of 10 million customers. Its "triple play" offering of TV, telephony and broadband is still growing strongly, particularly the former where the introduction of HD TV has caught the public's imagination.

"Put together this means that the current market view is that the shares are a strong hold for existing investors and perhaps even a cautious buy for those with a more steely disposition."

The sinking share price demonstrates the value of portfolio diversification, says Gavin Haynes, investment director at IFA Whitechurch Securities.

He says: "The phone hacking scandal is best described as a "black swan" event from an investment perspective, in the damage it has caused to the BSkyB share price. What it does highlight is how stock specific risk can damage the value of your portfolio if you don't have sufficient diversification to dilute the risk. The fall would have been pretty painful for shareholders.

"Whilst investors in funds holding the stock would also have been affected, the diversification benefits of investing in collective investments would have helped limit losses. A fund with a 3% holding would have only seen a 0.6% fall in the value from a 20% fall in the share price – disappointing yes, but by no means disastrous."

Brian Dennehy from IFA Dennehy Weller & Co adds: "Takeovers always create volatility around a share price, but this has little or nothing to do with whether the company is a good long-term investment – it was just icing on the cake. No one should sell in the midst of the current mayhem if you bought them for the right reasons – allow the dust to settle."

What about a buying opportunity?

Smart Investor says on Citywire Money: "..many private investors wondered whether this could be ‘another BP' – in other words the opportunity to buy a slice of a well-established, highly profitable company at what appeared to be a relatively low price."

He concludes on the blog: "Indeed BSkyB scores highly on performance, with an enviable free cash flow and impressive ROE. However it lives with high levels of debt and the current share price massively overstates the value of the company.

"So, is it worth taking a punt in case another, higher bid comes along in future? A better idea would be to invest in something which has performed well, is financially sound and offers good value – and stick to red or black for your punts."

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