Ask ten Comcast (NASDAQ:CMCSA) shareholders if they really wanted the company to get into a bidding war with Walt Disney (NYSE:DIS) for most of Twenty-First Century Fox (NASDAQ:FOXA), and you’ll get ten different answers. By and large though, a common and unspoken response to Comcast’s probably bowing out of the race for Fox is “whew… expensive bullet dodged.”
The curious part? It’s some of the investors who liked the idea of a Comcast/Fox pairing that are now subconsciously glad it’s not likely to happen.
That may or may not be evident in the way CMCSA stock has changed price as the saga has progressed. Shares spent most of the year so far retreating on the assumption that Disney would indeed nab Fox. Comcast stock perked up in mid-June, when it sought to outbid Disney. Even when Disney submitted a higher bid a week later, CMCSA shares kept truckin’ on the assumption Comcast would once again counter. Now that it’s clear Comcast likely won’t place another, higher bid, the CMCSA retreating again.
But, maybe this is the best thing that could happen for the would-be suitor.
Why Is Comcast Stock Down?
Why is Comcast stock down 20% from its January peak, even with the slight rebound from its early June low? The latest leg — Tuesday’s 2% tumble — was prodded by word that the company wasn’t likely to remain in the bidding for most of Fox’s properties. As CNBC’s David Faber bluntly put it based on his conversations with unnamed sources, it seems “highly unlikely at that point that Comcast is going to counter” the latest offer from Walt Disney.
It all begs a much bigger, more philosophical question though: Did Comcast really need or truly want Fox? A close second for the worthiest question: Could Comcast even afford the $65 billion it offered in June, let alone a bid in excess of Disney’s most recent bid of $71 billion?
Cord Cutting and Competition
As to the first question, while it’s not clear Fox’s assets would have been a perfect fit for Comcast, Comcast can’t be picky about any help it gets here.
Comcast is the combination of a cable television provider, broadband service provider, NBC, Universal Studios, and a handful of theme parks and entertainment venues. Fox, meanwhile, includes several popular television channels as well as a movie studio, plus a lineup of regional sports networks that wouldn’t be allowed to remain part of the acquisition due to regulations about the concentration of programming.
With just a superficial glance there’s no dispute that these two organizations have something unique to offer one another… even if it’s just more scale. But, Comcast looks healthy enough as is (see graphic below). Fixing what isn’t actually broken could in fact break something, and there’s no assurance combining the two outfits would make things better for either.
Click to Enlarge
There are a couple of strong undertows starting to work against Comcast in earnest either way though, as evidenced by the slowing growth rates that most analysts only expect to worsen as time marches on. Indeed, the pros may be underestimating those headwinds.
One of them is the advent of alternatives to cable television. Yes, Netflix (NASDAQ:NFLX) is one of them, though hardly the only one. Though the cord-cutting movement has sped up through last year, it’s not done accelerating yet. A recent survey taken by consulting firm cg42 suggest 5.4 million U.S. households will cut the cable cord this year, up from 2017’s record-breaking 4.8 million.
It is worth noting that Comcast owns 30% of Hulu, which it shares with — wait for it — Disney and Fox, along with AT&T (NYSE:T). This is not enough to fight against cord-cutting, however.
Another worry for Comcast is the prospect of a Disney/Fox deal that could potentially give the combined company greater distribution control (read “leverage”) of the TV and film industries.
AT&T and Time Warner are now one and the same, so vertical integrations are already at hand. Though these entities aren’t supposed to be able to do some self-dealing when it comes to providing and distributing content, it would be naive to think it won’t happen. That leaves Comcast on the wrong side of the table, and in need of a negotiating partner.
Affordability
As to the question of affordability: although Comcast would have likely been able to raise the money it needed to submit a higher bid, that doesn’t mean it should have done so. Moody’s was and still is concerned enough to make a point of saying so. Even if Comcast only ends up making a bid for the UK’s Sky network of television channels (which Fox is also still bidding on), it’s still a credit negative for the organization.
But, Moody’s also points out that were Comcast to submit an offer better than Disney’s latest, its total debt would balloon to $170 billion. That would make the cable and entertainment giant one of the world’s most indebted companies — and even more credit negative — operating in an industry that isn’t exactly humming. Cowen analyst Gregory Williams explained it in no uncertain terms: “It’s an unprecedented amount of debt for a company like Comcast.”
It’s difficult to find any potential financial reward greater than the fiscal risk of a Comcast acquisition of Twenty-First Century Fox.
The Last Word
Bear in mind that Comcast may still come back with a higher bid; it’s only a rumor that it won’t. Only time will tell what Comcast is going to do. The deadline for a new bid is effectively July 27th, when Fox shareholders plan to meet and vote on Disney’s offer. If Comcast was going to come up with a better bid though, it likely would have done so by now.
While the idea of pairing up with Fox seems like a compelling one to Comcast investors, not pursuing the matter any further may well be the best decision in the long run.
There’s no assurance there would be any meaningful synergies actually achieved by uniting the two organizations, particularly when Comcast has plenty of other things to fix (like its cable business). Disney, on the other hand, seems much better suited to do something fruitful in partnership with Twenty-First Century Fox.
That may be the reason CMCSA shareholders are frustrated, in fact. This isn’t so much about not winning the bidding war for Fox. It’s more about the prospect of a competitor becoming even tougher.
Said more plainly, the biggest upside to Comcast garnering Fox may have simply been that Disney wouldn’t have. But, that in itself isn’t enough to keep the bidding war going. Though the company is being panned right now, ultimately, a crisis may have just been averted.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.
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