Comcast today submitted a competing bid for 21st Century Fox, initiating what could well result in a high-stakes bidding war with its biggest media rival, The Walt Disney Co.

The U.S. cable giant made an all-cash offer of $65 billion to acquire much of Fox’s film and television assets, its international holdings and its stake in the Hulu streaming service. The $35-per-share offer represents a 19% premium on Disney’s $52.4 billion all-stock offer for the same assets.

Brian Roberts
Roberts
REX/Shutterstock

“We have long admired what the Murdoch family has built at 21st Century Fox,” wrote Comcast CEO Brian Roberts in a letter addressed to Rupert, Lachlan and James Murdoch (read it in full below). “And our meetings last year, we came away convinced that the 21CF businesses to be sold are highly complimentary to ours, and that our company would be the right strategic home for them.”

Roberts expressed disappointment in Fox’s selection last year of Disney as its deal partner, despite Comcast’s more lucrative all-cash offer. The company decided to sweeten the deal following yesterday’s ruling in the AT&T-Time Warner antitrust case.

Comcast confirmed last month it planned to make a rich counter-offer for Fox, but appeared to be awaiting the outcome of the AT&T-Time Warner merger that was being challenged in court by the U.S. Department of Justice. Judge Richard Leon yesterday eviscerated the DOJ’s arguments in seeking to block the deal on an untested theory of competitive harm by the combining of two companies whose businesses do not overlap.

“The clarity of his opinion and his urging of the DOJ not to appeal this decision (as a means of disrupting the transaction, which must close by June 21) will likely be interpreted by Comcast as a green light to bid for Fox’s assets,” notes media analyst Michael Nathanson.

The decision clarified an uncertain regulatory environment and emboldened the cable operator to make its move on Fox. Nathanson predicted a $40-per-share bid for Fox’s assets, well in excess of its earlier $34.41 offer. He and other Wall Street analysts expect Disney to match Comcast’s offer, potentially taking on $37 billion in debt to do so.

“We continue to believe that Disney has the superior balance sheet, cost of debt, equity and rationale to emerge victorious over Comcast in a bidding war,” Nathanson writes. “The question is will Disney’s board and management go to the mat on this transaction? We think the answer is yes.”

In its offer letter today Comcast matched Disney’s commitments to Fox, including the same $2.5 billion termination fee if the deal fails to close, and offer to reimburse Fox for the $1.5 billion break-up fee it would pay Disney for walking away from the deal.

Comcast also promised the same divestiture package as Disney, agreeing to sell off thee regional sports networks or any part of the business representing pre-tax earnings of up to $500 million.

Significantly, it would also cover any tax obligations from the transaction.

For Comcast, which is largely a domestic company, Fox represents a major leap onto the global stage. Fox’s 39% stake in the UK’s Sky and in Star India would boost the U.S. cable operator’s international income to 25% of revenue. The math was obviously a key driver of Comcast’s pending $31 billion bid for Sky; both acquisitions will now be pursued concurrently.

New sources of revenue would bolster Comcast’s bottom line as it copes with a structural decline in pay TV business in the U.S. as price-sensitive consumers cancel their subscriptions or opt for lower-cost video services.

Fox’s entertainment assets — its film and television studios, the Fox film franchises and deep library, the FX and National Geographic cable TV networks, and 22 cash-cow regional sports networks — would enhance Comcast’s entertainment portfolio. The company already owns NBCUniversal and DreamWorks Animation and America’s largest cable TV system.

Such an entertainment arsenal would be valuable in building a direct-to-consumer service, as Disney cited as part of rationale for its own offer for Fox.

Through a Fox deal, 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.

Hulu 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 of Hulu, with its 20M subscribers and the potential to challenge dominant Netflix.

Hulu

Comcast will need to convince Fox’s board of directors — and ultimately, its shareholders — that the deal would not pose greater regulatory risks than Disney’s offer. That’s no trivial consideration, since the U.S. government imposed conditions on Comcast’s 2011 purchase of NBCUniversal to protect competition.

Roberts addressed this head-on in his letter to the Murdochs.

“We are  … highly confident that our proposed transaction will obtain all necessary regulatory approvals in a timely manner and that our transaction is as or more likely to receive regulatory approval than the Disney transaction,” Roberts wrote.

He also urged swift action, noting that Disney and Fox’s shareholders are scheduled to vote July 10 on that deal.

“We are available to meet at any time to answer questions of the board, management or your advisors, so that you are in a position to validate the superiority of our offer, and negotiate and enter into a merger agreement, as soon as possible thereafter, Roberts wrote.

The competitive stakes for the cable giant, which abandoned its 2004 bid to acquire Disney, are just that high.

“We increasingly believe Comcast views the acquisition of both Fox and Sky as ‘must-wins’ as it tries to replicate Disney’s size and global scale/prowess in content creation (Comcast has long had “Mouse Envy”),” wrote BTIG analyst Rich Greenfield. “Not only are there no obvious alternatives to Fox/Sky, if Disney succeeds in the purchase of both companies, Comcast is unlikely to ever be able to catch-up or even draw close to Disney’s dramatically enlarged global footprint.”

Here’s Comcast’s letter to 21st Century Fox’s board of directors:

June 13, 2018

Board of Directors
Twenty-First Century Fox, Inc.
1211 Avenue of the Americas
New York, New York 10036

Attention:
Mr. K. Rupert Murdoch, Executive Chairman
Mr. Lachlan K. Murdoch, Executive Chairman
Mr. James R. Murdoch, Chief Executive Officer

Dear Rupert, Lachlan and James,

We have long admired what the Murdoch family has built at Twenty-First Century Fox. After our meetings last year, we came away convinced that the 21CF businesses to be sold are highly complementary to ours, and that our company would be the right strategic home for them.

So, we were disappointed when 21CF decided to enter into a transaction with The Walt Disney Company, even though we had offered a meaningfully higher price. We have reviewed the publicly available terms of the proposed Disney transaction, as well as the joint proxy statement/prospectus filed with the SEC describing the reasons for the 21CF Board of Directors’ decision. In light of yesterday’s decision in the AT&T/Time Warner case, the limited time prior to your shareholders’ meeting, and our strong continued interest, we are pleased to present a new, all-cash proposal that fully addresses the Board’s stated concerns with our prior proposal.

Our new proposal offers 21CF shareholders $35.00 per share in cash and 100% of the shares of New Fox after giving effect to its proposed spinoff, providing superior and more certain value as compared to Disney’s all-stock offer. Our proposal represents a premium of approximately 19% to the value of Disney’s offer as of noon today. We are highly confident in our ability to finance the transaction, and our offer includes no financing-related conditions.

We are also highly confident that our proposed transaction will obtain all necessary regulatory approvals in a timely manner and that our transaction is as or more likely to receive regulatory approval than the Disney transaction. Accordingly, we are offering the same regulatory commitments as the ones 21CF has already obtained from Disney, including the same $2.5 billion reverse termination fee agreed to by Disney. To further evidence our commitment, we also are offering to reimburse the $1.525 billion break-up fee to be paid by you to Disney, for a total cost to Comcast of $4.025 billion, in the highly unlikely scenario that our transaction does not close because we fail to obtain all necessary regulatory approvals.

We welcome the opportunity to discuss the regulatory issues presented by each deal. We note that there should not be any meaningful difference in the timing of the U.S. antitrust review between a Comcast and Disney transaction. We have made our HSR filing today, which formally begins our regulatory review at the DOJ. In addition, we have already submitted a large volume of documents and data to the DOJ in connection with its review of the Disney transaction. This information largely overlaps with the information that the DOJ will need to review a Comcast transaction. As a result, our transaction should be reviewable by the DOJ in the same cycle as Disney’s transaction. We similarly expect that our transaction should be reviewable by international regulators in as timely a manner as the Disney transaction, and should be as or more likely to receive international approvals, given our relatively small presence outside the U.S.

Our Board of Directors has unanimously approved this proposal, and no Comcast shareholder vote will be required for this transaction.

Because of your decision to schedule the vote on the Disney merger proposal for July 10, time is of the essence for your consideration of our proposal. We are available to meet at any time to answer questions of the Board, management or your advisors, so that you are in a position to validate the superiority of our offer, and negotiate and enter into a merger agreement, as soon as possible thereafter. Given the very short time frame, today we are filing a preliminary proxy statement with the SEC in opposition to the Disney merger proposal, as we have been advised this is necessary to be in a position to be able to communicate with your shareholders directly regarding the votes they are being asked to cast on July 10. We hope this is precautionary only, as we expect to work together to reach an agreement over the next several days.

More detailed information regarding our proposal is attached.

I look forward to our discussions and working with you toward completing this exciting transaction for the Fox shareholders.

Very truly yours,

/s/ Brian L. Roberts

Brian L. Roberts

Chairman and CEO