Hello. Welcome to Company Focus. My name is Aamer Nawid, Research Analyst at Fat Prophets and this week I'm going to be taking a look at British Sky Broadcasting.

I suppose the World Cup is providing us with a reminder of the financial power of sport and having snared rights to the FA Premier League in 1992, BSkyB haven't looked back. The company now has evolved. Offers triple play, high definition and a while host of other exclusive contents, so it's no surprise to see Rupert Murdoch's News Corp coming knocking with a proposal to buy the 61 per cent of the company that they don't already own for an offer which equates to around about £7 per share.

Having seen his initial advances rebuffed, I can see Murdoch returning with a better offer sooner rather than later. Why? Well, Sky has proved itself to be an efficiently run, highly cash generative company. The company is now in more households. It's managed to implement price increases effectively and has boosted revenues, free cash flow and earnings per share.

As the chart here shows, Sky has managed to navigate the recession relatively well. Subscription numbers are up to just under 10 million and when you consider the number of households in the UK is 26 million, that's no mean feat. The robust performance also underlines the defensive and resilient nature of in-home entertainment.

Now Murdoch has got a ringside view of all this. He owns 39 percent of the company so he can see quite clearly what's going on. He probably views Sky's growth as a bit more predictable, a bit more assured than say other parts of his empire. His company has done very well through the box office smash Avatar, but his newspaper business is going through a bit of a transition as advertising spend goes more and more from print to the online space.

Sky has a clear distinct advantage over its peers. Even through the share price performance here is pretty competitive, the company simply has more subscribers, makes more money and therefore, is able to outbid whenever it comes to the crown jewel which is the FA Premier League.

ITV is reliant on advertising revenue. Other pay TV competitors such as Virgin Media, well again, they don't have the numbers and therefore the financial clout that Sky has in abundance.

To rub salt in the wounds, if you like, Sky also charges its competitors a premium for its sports service, so the company is profiting even when consumers opt for the alternatives and it also manages to get its brand name onto the competitors' services.

But it's not all plain sailing when it comes to Sky. There are bumps in the road and I think regulation is one that investors need to be aware of.

Regulation firstly in terms of the Premier League, the European regulators have stated that more than one company has to have rights to the Premier League. It can't be exclusive. But more recently, the OFT (Office of Fair Trading) have stated that Sky should charge wholesale prices rather than a premium for its service to its competitors. This is going to eat into profits, but Sky has appealed the decision and is awaiting the outcome. Regulation could also provide a headwind for the Murdoch deal.

As you can see from the chart here, shares surged forward and have gravitated around the £7 mark. Now, although directors have stated that £8 is the minimum at which a deal should be done, the market clearly remains a little bit dubious or a little bit sort of wary as to whether this will actually materialise and that's partly down to regulation and also partly down to the actual follow up from Murdoch.

I think overall, from my point of view, I can see the Sky shares actually sort of staying where they are in terms of share price around about the £7 mark or even pushing on, even in the absence of the Murdoch situation and it's all due to the growth potential on offer.

The company is highly cash generative and it's going to look to pay down debt as soon as possible. There is an argument which basically states that the number of households that it can penetrate is limited given that it has done so well so far, but what it can do is it can expand its product offering and that could provide further impetus to the growth story. It's worth noting that of Sky's customers, only 19 per cent have all their services on offer, so lots of upside potential there.

The company is going to offer a 3D TV channel later on this year and it could even potentially go into the world of mobile telephony which will mean instead of a triple play, it offers a quadruple play service.

All these sort of add-ons are earnings accretive and underline the fact and the reason why I believe Murdoch will be back with an improved offer sooner rather than later.

Thanks for watching. Make sure you tune in again next week.