Why Comcast Faces a Big Risk With Debt Its Fox Deal Will Bring


Comcast stock - Why Comcast Faces a Big Risk With Debt Its Fox Deal Will Bring

Source: Picture by Mike Mozart, used under creative commons license

The bidding wars have begun. And that isn’t a great thing for Comcast (NASDAQ:CMCSA).

Ever since a federal judge approved the mega-merger between AT&T (NYSE:T) and Time Warner (NYSE:TWX), Comcast and Walt Disney Co (NYSE:DIS) have upped the ante in their acquisition pursuits of Twenty-First Century Fox Inc (NASDAQ:FOXA).

Disney’s original bid for Fox’s movie and television assets was around $28 per share. Comcast rivaled that with a $35 bid last week. Now, Disney has upped its bid to $38 per share.

This is all great news for Fox. The company’s movie and television assets will more than likely get acquired at a massive premium, and Fox stock is reasonably soaring in response.

But for Comcast stock and Disney stock, this bidding war isn’t great news. It means a potential $60-, $70-, or $80-billion acquisition, which will primarily be financed through the debt markets.

In plain English, that means that whoever wins this bidding war for Fox will inherit a ton of debt. That is particularly bad news for Comcast stock. In the event of acquiring Fox, Comcast projects to be one of the most indebted companies in the world.

Can Comcast manage all that debt? Maybe. Maybe not. No one really knows since debt levels this big are untested in times of financial duress.

But one thing is for sure. A Comcast acquisition of Fox is necessary.

Here’s a deeper look.

An Acquisition of Fox Is Necessary

Comcast is aggressively pursuing Fox assets at any cost because that is the necessary move in order for Comcast to grow long-term.

The entire media industry has been uprooted by Netflix (NASDAQ:NFLX). The era of linear TV is coming to an end, and the era of internet TV is just beginning. That means that the days of Comcast’s box-and-cord cable business are coming to a close. Considering the video business presently represents about a fourth of Comcast’s total revenues, this secular transition away from the linear TV model and toward the internet TV model is a big deal for Comcast.

How does Comcast’s video business survive?

Pivot into internet TV. Build a streaming platform like Netflix. And offer it at comparable monthly rates to Netflix.

How does Comcast ensure the success of this streaming platform?

Acquire/develop as much original content as possible. In the streaming wars, content is everything. It wasn’t until Netflix developed a robust portfolio of original content that the stock took off like a rocket ship.

Thus, the path toward success in the media business for Comcast involves acquiring and/or developing a robust suite of content.

That path inevitably leads Comcast to acquiring Fox. Fox owns a ton of valuable content which consumers have shown a willingness to pay to watch. Therefore, if Comcast wants its video business to survive, it needs to acquire Fox.

An Acquisition Is Also Risky

But just because this acquisition is necessary doesn’t mean it is a great move.

The only way Comcast gets this deal is done by tapping the debt markets for $60 billion or more in financing. That would be in addition to the $30 billion Comcast is already borrowing to buy British satellite broadcaster Sky.

All together, if both of these acquisitions go through, then Comcast stock would have $170 billion in total debt. That would make Comcast the second-most indebted company in the world behind AT&T. The leverage ratio would hover around 4.25 times, the third-highest leverage ratio among high-debt companies behind AT&T and Anheuser Busch (NYSE:BUD).

Debt levels this high have never been seen before, and as such, no one really knows how this will play out. This is especially true since it has been a decade since the last economic downturn. The longer this economic expansion lasts, the higher the likelihood of a downturn around the corner.

In an economic downturn, an unprecedentedly levered company like Comcast stock will struggle. Even without an economic downturn, carrying so much debt in an era of rising interest rates is a threat to financial stability.

Bottom Line on Comcast Stock

Can Comcast manage all the debt that its Fox deal will bring?

No one really knows. But it is an acquisition that Comcast must make in order to ensure its video business lives another day. As such, this acquisition is a necessary but risky move.

Do you buy Comcast stock as a result of this acquisition? No. Too much risk. Watching from the sidelines is the best move here.

As of this writing, Luke Lango was long DIS and T.

Article printed from InvestorPlace Media, https://investorplace.com/2018/06/comcast-cmcsa-stock-big-risk-debt-fox-deal-will-bring/.

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