We are aligned regarding buying into a business based on an assessment of intrinsic value (which should boil down to projected cashflows, discounted at an appropriiate rate).
However, owning Sky TV has been a big learning curve in other aspects. And it has taught me that though the Value Investor Bible might say "just ignore quoted value forever, so long as the FCF is tracking along near enough to your projections you will come good... eventually...maybe..."...that isn't actually the whole story.
And I don't believe Buffett (back in his Partnership days) would be happy holding a business like Sky 'forever' with a continually languishing SP. And the reasons are:
- As stated above the long term low SP actually retards Sky's prospects. It becomes a self-fulfilling prophecy (value trap even). Her shares make for poor currency so she can never buy anything substantial to grow. Because she can't grow meaningfully and in a more diversified way the market hates her future prospects even more. The SP continues to fall therefore making M&A in the future even less likely.
- Because Sky is essentially 'stuck' and cannot grow meaningfully, those projected cashflows out into the future become far less 'certain'. The market seems happy to establish Sky's FCF profile for about 5 years worth at any given time, but beyond that...as far the the market is concerned Sky will probably be bankrupt. A dividend won't matter as much as you think. Not by a long shot.
Maybe under Berkshire he wouldn't mind holding onto Sky as a 100% owned subsidiary because he could nick the entire FCF if he wanted and deploy the cash elsewhere.
We don't have that luxury.So though I do still read from the Buffett Bible (it is how I am able to enter a fugue state in the evenings as I imagine holding all these amazing businesses 'forever'...) I do still have enough independent thought to see the situation for what is is in regards to a content aggregator like Sky.
If they don't do a deal now, I virtually guarantee you that we get a sugar hit in August/September (causing the SP to go to $3 or so) and then the price will crash after it wears off to somewhere between $2-$2.50 per share.
And we can supply the market with all the DCF analysis we want, it will be to no avail.
If Sky wants to remain a listed business she has to buy something or merge with something substantial. She can't do that right now, as discussed.
So they need to extract maximum value and go private. Ideally a takeover by 2D to give Sky her best future prospects in my view.
