Disney appears to hold a clear advantage over Comcast in its pursuit of Fox, according to several prominent media analysts. The company will likely emerge the victor in the bidding war for the collection of film and television assets that Rupert Murdoch has assembled over three-plus decades.
With a little more than three weeks to go until shareholders vote on Disney’s $71.3 billion cash and stock offer to acquire much of Fox, media analysts say the Burbank entertainment giant has gained the upper hand with a bid that’s not only more lucrative, but also offers tax advantages for the Murdoch family and potentially other shareholders. It’ll also be easier for Disney to win the support of a majority of Fox’s shareholders, since the Murdoch family already has pledged to cast its votes in favor of the deal.
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Any counteroffer from Comcast would need to be substantially more than its previous $65 billion all-cash bid to claim the prize, Wall Street observers note. The U.S. cable and media giant is hardly deterred by the odds, and is said to be in talks with potential funding partners to submit a richer bid, which some analysts predict could approach $47 a share.
“The issue we see is that the strategic rationale just doesn’t appear to be there for Comcast to chase,” wrote Cowen and Co. media analyst Doug Creutz. “Management cited geographic diversification as an important reason for the bid. However, if Comcast shareholders desire that type of diversification, they are completely free to go rebalance their portfolio in the open market without paying a big M&A premium.”
The stocks in the three media giants are not making dramatic moves ithis holiday week. In afternoon trading, Fox and Disney are off a fraction at $48.88 and $104.79, respectively. Comcast is up a dime at $33.26.
Whatever the M&A outcome, one effect of the battle is clear: Disney and Comcast will leave the bidding process “mortal enemies,” says BTIG media analyst Rich Greenfield. (In his updates on what he has dubbed “#BattleFox,” Greenfield uses the puckish illustration of Comcast CEO Brian Roberts and Disney chief Bob Iger in a Star Wars lightsaber duel.) Tensions have been steadily rising, as evidenced by Iger pointedly attacking Comcast’s potential to win regulatory of a Fox acquisition.
“The source of rising tensions is clear, as Comcast has already forced Disney to pay 35% more for Fox than it had originally agreed upon and caused Disney to stop its share repurchase program,” wrote Greenfield. Add to that the cost of Comcast’s competing bid for UK satellite broadcaster Sky TV, with its 23 million subscribers in seven countries, which may force Fox to up its offer for Sky in the coming days (and increase Disney’s overall debt load from the two planned acquisitions).
Greenfield observes that the bidding war comes at a time when Disney is heading into a major investment cycle for its Disney-branded streaming service scheduled to launch next year, “one that we believe investors are severely underestimating as it tries to build a global SVOD platform to compete with Netflix.” The tab could run into the billions, the analyst estimates, at a time when the company has opted to forego revenues from the content syndication from distributors such as Netflix, which is estimated to have generated $300 million annually in revenues.
“If we were in Comcast’s shoes, we would literally push Disney to their breaking point to see if we could make them blink and give up,” Greenfield wrote.
That sentiment is hardly a unanimous one among media watchers.
Cowen and Co.’s Creutz wrote it’s time for Comcast to stand down.
Iger has made the case that Fox’s complimentary properties — including its Avatar, X-Men and Planet of the Apes film franchises and Family Guy, Homeland, Empire, Atlanta, and American Horror Story TV shows — will further Disney’s strategy to build a Netflix rival.
“While we disagree with that assessment — we think Disney has sufficient assets to be successful, and adding Fox just dilutes their brand and asset mix — we could be wrong,” Creutz writes. “Most importantly, Disney management clearly believes in that idea. Comcast (for fairly obvious reasons) has little incentive to play up the direct-to-consumer angle.”
Comcast’s Roberts has talked about the value of Fox’s international holdings — its ownership of Star India, one of India’s largest media conglomerates, its 39% stake in UK satellite broadcaster Sky TV — and its potential to broaden the reach of the largely U.S.-centric company.
“Disney has a much better reason (from their perspective) to escalate bidding than Comcast does,” Creutz observes.
Needham & Co.’s Laura Martin has done a bit of ballot counting to conclude that Disney has an easier path to winning shareholder approval.
Although the Murdoch family holds a 40% controlling interest in Fox, the company’s charter grant voting authority to all stock holders — including those who have class A common stock — in the event of a significant merger or consolidation.
“Since we expect the Murdoch family to vote its 17% of shares in favor of the Disney bid, and a 51% simple majority is all that is needed to win, Disney only needs about 40% of non-Murdoch shareholders to win,” Martin observes. “This compares with requiring about 50% of non-Murdoch shareholders for Comcast to win.”
In a research note this morning, Macquarie’s Amy Yong revised upward some of her estimates for Comcast’s second-quarter financials but reasserted her neutral rating on the company’s stock. The climate of consolidation has made some investors wary of Comcast’s debt levels should it push harder toward doing deals. “M&A/leverage trump near-term earnings,” Yong wrote.
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