In a market that’s turned south, Comcast Corporation (NASDAQ:CMCSA) has been one of the biggest victims. The CMCSA stock price sits at a 17-month low, with Comcast stock off 24% from January highs.
The weak broad market has been one culprit. But of late, Comcast’s interest in buying Sky Plc (ADR) (OTCMKTS:SKYAY) is another. That interest has led to fears of a bidding war. Twenty-First Century Fox Inc (NASDAQ:FOXA,NASDAQ:FOX) has a bid in for the 61% of Sky it doesn’t already own — and Walt Disney Co (NYSE:DIS) is looking to buy Fox itself.
On top of that are concerns about steady decline in video subscribers as cord-cutting options proliferate. So the clear risk at the moment is that Comcast winds up buying more than Sky — potentially Fox itself — and becoming a more leveraged play on the same cord-cutting concerns.
That’s a very real risk — and a long-term reason to be cautious toward Comcast stock. In the near term, meanwhile, there’s a strong case for letting the dust settle. As seen with Qualcomm, Inc. (NASDAQ:QCOM), it’s near impossible to find an edge guessing how a corporate battle will play out. So for short- and long-term reasons, it’s best to stay on the sidelines with CMCSA stock — at least for now.
The Concerns About Sky
Comcast has topped Fox’s bid for Sky, offering 12.50 pounds per share, against the 10.75 pounds offered by Fox. The bid so far is unofficial; the Sky board of directors has acknowledged the bid, but this month entered into a confidentiality agreement with Fox and Disney.
The first risk here is that Comcast winds up in a bidding war. Sky shares in London are trading above 13 pounds, showing the market anticipates a higher price from at least one of the suitors. Comcast’s offer already is valued at $41 billion, including $10 billion in debt, according to the company’s presentation. Raising the bid another 20% would cost an additional $6 billion or so.
That’s not a lot in the context of the current CMCSA stock price, which still implies a market capitalization of about $150 billion. But the question is whether Comcast will go beyond Sky. As Laura Hoy pointed out, Comcast could potentially buy Fox instead — a deal that would cost over $50 billion, at least.
Antitrust concerns will surround any acquisition of Fox — particularly given the similar risks facing the acquisition of Time Warner Inc (NYSE:TWX) by AT&T Inc. (NYSE:T). But if Comcast winds up buying Fox in a leveraged deal, its balance sheet could begin to look somewhat bloated. And it would have little room for error if cord-cutting defections and/or content weakness accelerates.
What This Means for Comcast Stock
In the near term, the M&A drama seems enough to keep investors on the sidelines. With four companies battling over assets, and an unpredictable government response, it’s exceedingly difficult to know just what Comcast will look like twelve months from now, let alone what it will be worth.
From a longer-term standpoint, I’m still a believer in Comcast stock. I argued in January, with the CMCSA stock price above $40, that the stock was too expensive. A 20% pullback makes the stock more attractive — but not quite compelling. Video subscribers are declining, as customers choose to stream Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) content on their Roku Inc (NASDAQ:ROKU) devices. (I should know — I’m one of those Comcast defectors.)
Indeed, the reason Comcast is potentially interested in M&A is that it needs to improve its business. In 2017, per the company’s 10-K, almost three-quarters of profit came from the Cable Communications segment (video and data subscribers). The Cable Networks and Broadcast Television units of NBCUniversal generate almost 15%. Filmed Entertainment and Theme Parks look solid — but, combined, generate about 12% of Comcast’s consolidated Adjusted EBITDA.
Comcast has to make a move or risk getting left behind. That’s a pretty major concern going forward. Adding Sky doesn’t fix its problems. Neither does adding Fox, unless Comcast can somehow finagle its way into owning all, or most, of Hulu in the process. That would at least give the company a base to challenge Netflix and Disney on the streaming side.
CMCSA stock is cheap, trading at about 8 times pro forma EBITDA in a Sky deal (per the aforementioned presentation) and less than that on its own. But this remains a business potentially in decline. Until investors have an answer as to how Comcast’s strategy will play out, that risk will remain.
And it’s too big a risk to take, even with Comcast stock at the lows.
As of this writing, Vince Martin has no positions in any securities mentioned.