UBS says Sky is 'cheap' after reports Fox might buy it

UBS' media analyst Polo Tang says investors are underestimating the potential of Game of Thrones broadcaster Sky, amid reports that Rupert Murdoch's Fox network could try again to buy it.

The Telegraph reported over the weekend that Fox could be considering a bid for Sky. The speculation comes after Fox, Rupert Murdoch's US broadcasting business, rejected two offers from Vodafone and Vivendi for its 39% stake in Sky.

Murdoch, who helped form BSkyB in the 1990s, runs and chairs 21st Century Fox, which owns Fox. The company recently announced Murdoch's son James will takeover the CEO position.

Murdoch tried in 2010 to consolidate his empire by having Fox buy BSkyB, now called just Sky. But the bid was heavily opposed and eventually dropped after the phone-hacking scandal blew up, engulfing Murdoch's papers in the UK.

In light of the Telegraph report, UBS' Tang told investors today that Sky looks "cheap" at the moment, with "the potential strategic value of Sky to a number of different parties... not reflected in the current share price."

Tang thinks investors are underestimating the growth potential of things like Sky's budget offering NowTV, its advertising targeting business Adsmart and its rental service Sky Store.

At the same time the benefits of having a pan-European operation - after the recent acquisitions of Sky Italia and Sky Deutschland - also aren't reflected in Sky's share price. All of this makes Sky an attractive bid target.

Sky has opened up over 3.5% today after Tang's note and the story in the Telegraph. Shares are 1,079 pence ($17.10), close to all-time highs but below Tang's target price of 1,200 pence ($19).

Tang doesn't say whether he thinks a takeover of Sky by Fox would make sense for either party, but he does note that conditions for the deal are favourable. Here's Tang:

The Telegraph report indicates the recent promotion of James Murdoch to CEO of Fox (he was the former CEO of Sky) and the recent election of a Conservative government as factors that could create a more favourable backdrop to revisit a bid. Fox originally tried to take 100% control of Sky in 2010 but ran into political opposition.

If Fox does buy Sky it would be one of a number of huge deals in the technology, media and telecoms sector. Cable operator Dish Network is in talks to merge with T-Mobile, Verizon is buying AOL for $4.4 billion (£2.79 billion) and Comcast and Time Warner tried to merge in a $45 billion (£28.4 billion) deal that eventually collapsed over competition concerns.

Vodafone is also in talks with Liberty Global about possible asset swaps, talks that could lead to the break-up of Vodafone.