It's been a busy week for Sky (LSE: SKY) shareholders. They've not only had to pore over the group's in-depth H1 results but also the preliminary response from the Competition and Markets Authority regarding its proposed acquisition by Rupert Murdoch's 21st Century Fox.
For Mr Murdoch, the news was mixed as the CMA ruled he would have too much control over the UK's news industry were he to gain full control over the broadcaster. Although this isn't the end of the world as there are ways to solve this before culture minister Matt Hancock makes the final decision by May 1st, it does throw up some roadblocks.
However, the group's impressive H1 results mean that even if this deal doesn't go through, it wouldn't be surprising to see rumoured interest from US media giants Comcast and Viacom turn into firm offers. A big part of their interest is due to dramatic consumer consumption habits that have stung traditional TV broadcasters but have also made them tempting targets for vertically integrated media firms such as Comcast and Viacom.
To this end, the fact that Sky added 365,000 customers across Europe during the half year will be particularly pleasing as its these eyeballs media firms are targeting. And then there's the added fact that Sky is actually performing quite well. In H1, the firm's like-for-like revenue rose 5% year-on-year, while increased operating efficiencies boosted EBITDA by a full 10%.
That said, Sky's current valuation of £17.6bn, or over 25 times earnings, means the group's takeover potential is pretty firmly baked into the share price. For would-be investors that means I see little upside in jumping in and buying its shares right now.
Is this year finally the year?
A more undervalued takeover target is tobacco giant Imperial Brands (LSE: IMB). The group seems to be a perennial favourite for takeover rumours due to lower profitability than peers such as British American Tobacco, relative lack of scale in some markets, and lack of a compelling next generation heat-only vaping device.
But with its share price down 20% over the past year and its valuation at a steep discount to its larger UK-listed rival, Imperial may be looking more attractive to would-be suitors. At the top of the list if Japan Tobacco, who could use Imperial as a rapid way to gain exposure to markets in the Middle East and North Africa, which would lessen its own reliance on highly-regulated Japanese and European markets.
This persistent rumour was boosted in November when Japan Tobacco named a new CEO who has experience overseas, oversaw large acquisitions in his previous posts, came right out and said in an early interview with Reuters that he wanted to expand overseas through acquisition, and that the size of any such deal wasn't a problem.
With Imperial's valuation down to 19.8 times earnings while kicking off a 5.8% dividend yield, now is an interesting time to take a closer look at the business. But I still see plenty more to like about its much more profitable and faster-growing rival, British American.
More to the point, investing in a business solely on the belief that it's a takeover target probably deserves its own place in the Motley Fool's free report, The Worst Mistakes Investors Make. This report includes advice from the Fool's analysts across the world on how to spot, correct and profit from the errors we all make as investors.
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Ian Pierce has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.