The U.S. cable giant said plans are in an “advanced stage” for it to make a richer, all-cash offer for the constellation of media assets that Fox agreed to sell to Disney last December in an all-stock deal valued at $52.4 billion. The price is likely to reach $60 billion and could go even higher, especially if a federal judge rules June 12 to allow AT&T and Time Warner to merge.
Having already been spurned by Fox’s board of directors last fall when it bid on Fox, the operative question surrounding Comcast’s decision to rejoin the hunt is: Why? Why would a stable company with strong financials and an enviable set of film, TV and distribution assets want to take on massive debt, risk regulatory hell and invite cultural integration angst by piling even more on its plate?
Two words: global reach.
Comcast remains primarily a domestic company, with just 9% of revenues coming from outside of the U.S. Fox would dramatically expand its international portfolio through its 39% stake in the UK’s Sky and in Star India. These assets would boost Comcast’s international revenues to 25% of the company’s income. The math was obviously a key driver of Comcast’s pending $31 billion bid for Sky. (The massive derby for the European pay-TV giant has its own seminal date June 15 when the European Commission weighs in.)
An injection of offshore cash certainly would come in handy, as Comcast copes with a structural decline in pay TV business as price-sensitive consumers cancel their subscriptions or opt for lower-cost video services. The cable operator has been shifting focus to its high-speed Internet business, and filmmaking, to maintain growth. Fox’s film and television assets — its film and television studios, the FX and National Geographic cable TV networks, and 22 cash-cow regional sports networks — would give Comcast’s entertainment portfolio historic scale. The company already owns NBCUniversal and DreamWorks Animation and America’s largest cable TV system.
Digital is another crucial element in Fox’s allure. Like its traditional media peers, Comcast is eager to find ways to fend off deep-pocketed tech titans — especially those known by the menacing term FAANG — short for Facebook, Amazon, Apple, Netflix and Google. These companies are spending billions to create content and grab market share from legacy entertainment players.
By buying most of Fox, Comcast would gain a controlling interest in the fast-growing Hulu streaming service, in which it now shares a one-third stake with Fox and Disney; Time Warner holds a 10% stake in the over-the-top service. The Hulu stake helps make Fox “a kingmaker asset,” in the view of UBS analyst John Hodulik. In a research note, he wrote that acquiring Fox would help Comcast gain “substantial library content, TV/film production and control of Hulu (20M subs) to potentially become the No. 2 DTC player behind Netflix.”
While all of this so far seems logical, several Wall Street investors and analysts were still scratching their heads a bit today.
“Given M&A maneuvers, it’s hard for us to have a clean thesis on Comcast,” said Amy Yong, an analyst with Macquarie. The “near-term negatives” from the offer, she said, “could pressure Comcast shares for some time.” The debt the company would be willing to take on has also set off alarms at Moody’s, which placed Comcast’s long-term debt rating under review following today’s announcement.
Net debt of $164 billion would give Comcast a leverage-to-cash-flow ratio of 4.1, much higher than the 2.7 mark the ratings agency put on the company. “Sharp departures from past practice and stated commitments, particularly as companies move up the rating scale, create significant doubts about commitments in the future,” Moody’s wrote.
And then there is its rival across the bargaining table, Disney — a company that Comcast chief Brian Roberts pursued with an unsolicited bid in 2004, with the subsequent rejection perhaps still stuck in his craw. In the years since then, as Disney has minted cash from its Pixar, Marvel and Lucasfilm deals plus parks and resorts, the company has flourished with Bob Iger at the helm. As a result, “Disney is in a strong position to compete with a higher bid from Comcast,” said Michael Nathanson of MoffettNathanson. “Given the regulatory hurdles involved in a Comcast bid (even if AT&T-Time Warner is approved), we believe Fox would still favor a Disney bid over Comcast and therefore limit how much Disney would need to further increase its bid in any potential bidding war.”
Ah yes, Washington. Fox’s board of directors favored the Disney offer, in part, because of the perceived greater regulatory risks associated with a Comcast bid. That’s no trivial consideration, since the U.S. government imposed conditions on Comcast’s 2011 purchase of NBCUniversal to protect competition. Trial proceedings in the U.S. v. AT&T this spring appeared to many observers and media execs to go favorably for AT&T, emboldening rivals to toe the starting line for the next heat.
Comcast was unwilling to carry the regulatory risk in its earlier talks with Fox, sources say. It apparently was not interested in offering a break-up fee if the deal failed to receive regulatory approval, whereas Disney was willing to provide such a guarantee. Given the head-snapping turn of the Deptartment of Justice moving to block AT&T and Time Warner — contrasted by utter silence, apart from President Donald Trump congratulating Rupert Murdoch, on Disney-Fox — it is hard to predict regulators’ ultimate stance.
One last factor that tilted the Fox deal in Disney’s favor was its all-stock offer, which effectively lowers the tax burden for the Murdoch Family Trust and every other Fox shareholder. An all-cash bid is treated like a financial windfall for shareholders, and therefore is subject to capital gains tax — a hit that could reach into the billions for the Murdochs. The stock swap does not carry the same penalty. With Comcast shares slumping 16% thus far in 2018, using stock simply hasn’t been an option.
Comcast could mitigate the tax implications by offering to compensate the Murdochs for the liability. The cable operator clearly wanted to alert Fox shareholders to the coming, more lucrative offer ahead of a scheduled vote on the Disney deal. Fox has not yet announced the timing, though CNBC reported it is scheduled for mid-July.