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End of the line for the Dirty Digger?

An article from The Entrepreneur, November 1998

The scale of the defeat suffered by BSkyB in having its bid for Manchester United referred to the Monopolies and Mergers Commission is being played down by company executives, not least because in the world of corporate finance anger is interpreted as weakness, and weakness can unleash the various hyenas and hounds that populate the merchant banks and investment houses.

It was clear days before trade and industry minister Peter Mandelson actually announced his decision to refer the bid, on the somewhat spurious grounds of competition, that BSkyB had been given indications about the direction in which the wind was blowing.

There was some discrete lobbying, but nothing too heavy. BSkyB was intensely aware that the public mood was running against it and senior executives felt that no referral might be as bad as a referral. It was, said one, "a lose-lose situation".

The company spin doctors under Texan managing director Mark Booth - the man who famously failed to name the position played by Dennis Irwin - were furiously scheduling meetings with key financial journalists to hammer home the message that in the longterm a referral would be the preferred option.

"We listened too much to the lawyers and didn't take enough notice of the politics," said one BSkyB apparatchik. "We'd be quite happy to argue our case."

The real feeling of annoyance, however, was voiced by Rupert Murdoch whose News Corp is the largest shareholder in the television company. Addressing his company's AGM he talked about a betrayal of the interests of small shareholders from all sides - still, a bit rich from a man who has spent much of his time trying to squeeze out his own small shareholders.

Murdoch's argument, shared by virtually every takeover lawyer, is the referral was a political rather than a business decision. The argument that ownership of United would give BSkyB an advantage in negotiating for Premiership television rights is as accurate, but irrelevant as saying that ownership of Coronation Street gives Granada an unfair advantage in any bids for the regional franchise.

Certainly, when the BSkyB bid was first announced, only the Independent Supporters Association appeared to think there was any chance of a referral. They mounted an impressive public relations campaign which led to no less than 46 MPs, including several junior members of the Government, lobbying for a referral.

Yet referral itself is still not regarded by BSkyB as a problem - the delay it causes might be. The MMC could take as long as six months to make its report and privately the politicians, particularly those from the North West, are pushing for a "comprehensive examination" - the longer the better.

If the City believed that this bid was fully valued, Murdoch would have little to worry about, but it does not. A well-sourced report in the magazine Business Age suggested that BSkyB negotiators had been authorised to go up to £l billion - a ludicrous figure based on business fundamentals, but as one investment banker pointed out: "This deal is not about the tangibles - it is about riding the brand."

Certainly nagging at the hems of this deal is the feeling that the club is being undervalued, that BSkyB's bid of £623 million is too low to sustain.

Also, Martin Edwards' trackrecord in levering value out of the shares is hardly impressive, this, remember, a man who was going to sell to Michael Knighton for just over £10 million.

The board is also far from unanimous that the deal being offered is the best that could be gained under any circumstances and even major institutional shareholders such as Phillips and Drew have been making noises of displeasure.

The investment banks have, naturally, been kicking around the figures, both Merrill Lynch and an unknown Wall Street brokerage have been busily canvassing clients for possible interest in a counter-bid, though United's brand is linked inextricably to the product so any form of leveraged buyout or break-up attempt is a non-starter.

Then there is Bernie Ecclestone who is being courted furiously by corporate financiers trying to find a home for the £2 billion that could flow into his coffers from the highly-complex Formula One bond he has developed.

However, the most obvious candidate to mount a counterbid is Granada, but it does not have BSkyB's need for a strategic brand in Asia and, therefore, would need to judge price on a business basis.

This is where its appetite for a prolonged struggle with BSkyB could be found wanting.

It is now no secret that BSkyB is prepared to fight any counterbid and the figure of £800 million is gradually floating around the City.

To trigger this, however, another bidder would need to enter the fray, pitching perhaps at £680 million.

Everyone is looking to Granada to make the next step, but so far the sounds coming from the company are mixed. No analyst is prepared to guess which way the company will move.

No one with a legal background believes that the MMC will rule against the bid and still fewer people expect the smaller shareholders to be able to get the votes needed to block it.

There could, however, be a major surprise. It is worth noting that just prior to referral the shares were trading well below the bid price. This suggests that the City is coming to the view that political and public pressure may in the end outgun the News Corp artillery.