Fox Hunt: Disney, It’s Your Move

By Dawn C. Chmielewski, Dade Hayes

Comcast 21st Century Fox

Few people in Hollywood or on Wall Street expect the Walt Disney Co. to meekly surrender 21st Century Fox to media rival Comcast, though the Burbank entertainment giant has been deafeningly silent on its next move.

Comcast submitted its highly anticipated $65 billion counter offer for much of Fox’s film and television assets, besting Disney’s all-stock bid by $10 billion. The Philadelphia-based media conglomerate turned up the heat by appealing directly to Fox’s shareholders to reject the Mouse House’s less lucrative offer.

“That puts the ball squarely in Disney’s court,” notes veteran telecom and cable industry analyst Craig Moffett. “Almost everyone expects them to make a counter bid. It’s only then that things will get truly interesting. Will Comcast then top Disney’s bid? How far can they go?”

Moffett thinks this could be the start of a bidding war.

“It’s hard to say who will ultimately win,” Moffett writes. “Comcast CEO Brian Roberts certainly seems intent on owning Fox. But Disney still has the advantage of using a combination of stock and cash, and, notwithstanding Rupert Murdoch’s assertion that he will prefer whichever is the higher bid, one can assume that tax-efficient stock issuances remain more attractive than cash.”

Investors today have shrugged off the potential implications for a bidding war, which could run parallel to a similar duel for control of European pay-TV giant Sky. Comcast stock finished the day up nearly 5% at $33.82, on above-average trading volume.

Some on Wall Street wonder how high Disney might be willing to go. Veteran media analyst Barton Crockett with B. Riley FBR notes that Disney is a fiscally disciplined media company.

“For it to stretch beyond the current multiples embedded in the Fox offer, we believe, would be tough,” Crockett writes. “Disney, we think, sees Fox as nice to have, but not a must-have. So Disney, we assume, is wedded enough to this concept to stretch to match the Fox offer. But we don’t see it going much higher than that.”

Crockett thinks Disney could supplement its stock offer with cash, which would minimize the tax liability for the Murdochs and other Fox investors. Comcast could also sweeten the pot with stock. Still, the analyst thinks Disney has the edge in bidding because of fewer perceived regulatory hurdles.

If Fox postpones the July 10 special shareholder vote to consider the sale, that would potentially open the door to a third bidder (Verizon had expressed interest in Fox in previous discussions).

Cowen and Co. analyst Gregory Williams admits it’s hard to know whether Disney will submit a “topping bid” because this situation is unprecedented for a company that rolled up a number of major acquisitions over the last dozen years — Pixar Animation Studios, Marvel Entertainment and Lucasfilm.

“Bob Iger (as far as we know) has never been put in a position where a Disney acquisition faced a challenge of this magnitude,” Williams notes.

Even if Comcast does prevail, though, some on Wall Street have concerns about the company’s debt. If a Fox transaction went through, a new report from Moody’s Investor Service says the combined entity would have about $170 billion in pro-forma debt. That would be the second-most of any company in the world — after AT&T and Time Warner. Comcast execs yesterday stressed that the addition of debt would be temporary and simply an extreme effort to show that, in the words of CFO Michael Cavanagh, “our money is where our mouth is.”

Moody’s, though, still wonders if even swinging two mega deals would be enough to truly transform Comcast. “We believe that even following these transactions, transitioning Comcast’s media businesses to be more competitive with the rapid growth in subscription- on-demand consumption and services like Netflix will still require significantly more content expenditures than what is currently being spent, which could pressure free cash flows as they gradually build traction,” the company’s report said.

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