In the unusual one-day auction process, Comcast prevailed over 21st Century Fox (most of which is about to be acquired by Disney), paying $40 billion, or more than 60% more than what Fox initially offered in 2016. Fox retains a 39% stake in Sky, with that minority interest transferring to Disney after the merger closes, likely in the first quarter of 2019.
Comcast’s stock price declined 6% to close at $35.63, on more than triple its average trading volume. The single-day drop was the stock’s steepest of the year and despite recent gains it has dropped more than 13% in 2018 to date. Disney, meanwhile, gained more than 2% to finish at $112.76. Buyer and non-buyer taking divergent paths isn’t uncommon, but the damage was unusually severe for Comcast, which along with Disney has the biggest market value in the traditional media business.
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One prevailing concern for Comcast investors is the fact that the aggressive bid has increased the company’s leverage levels. The owner of the No. 1 U.S. cable system and NBCUniversal will have leverage of 3.5 times EBITDA. Had Disney won the day, it would have hit four times EBITDA. Higher leverage limits maneuverability, so the additional worry is that Comcast decided to take on large debt levels in order to buy satellite distribution instead of another asset that may have been more potent long-term.
Saying it “grossly overpaid” for Sky, MoffettNathanson downgraded Comcast to a neutral from a buy. The firm maintains buy ratings on Disney and Fox.
“We fear that Sky will be an albatross,” the firm’s principals, Craig Moffett and Michael Nathanson, wrote in a note to clients. “Comcast would like to have investors view Sky as a platform-agnostic collection of proprietary programming agreements that can serve as a springboard to create a global OTT provider, and, to be fair, the company does indeed have many proprietary programming agreements. But it seems as though they would like investors to forget that it is also a satellite TV provider, and satellite video distribution is increasingly becoming obsolete.”
From the Disney shareholder point of view, the result of the auction is being viewed as a crisis averted. “We had worried that if Disney/Fox ended up running Sky, Disney would enter a competitive European pay TV business that was removed from its core content/theme park wheelhouse,” wrote Barton Crockett, an analyst at B. Riley.
Todd Juenger of Sanford Bernstein agreed, calling it “the best possible result for Disney.” In a research note titled “Disney Dodges a Bullet (And Then Some) As Comcast Pays A Huge Premium For Sky,” he wrote, “We never understood why Disney would want to operate a European DBS business, and we never understood how Sky would contribute to Disney’s DTC strategy.”
Rich Greenfield at BTIG said the auction outcome will limit the options for Comcast in the near term. “Investor dreams of a breakup of Comcast into its content and distribution pieces are all but squashed now,” he wrote. “Vertical integration is more meaningful in Europe (Sky) than in the U.S. and it makes much more sense to have the company together now – even if it is a sub-optimal outcome in the United States that likely limits Comcast’s domestic M&A ambitions.”
As it becomes more of a presence in Europe, Greenfield speculated, Comcast may develop an appetite for international programming. By that logic, he said, Discovery could make for “an interesting acquisition in 2020.”
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