It’s official … almost. Comcast (NASDAQ:CMCSA), one of the nation’s biggest cable companies and owner of NBC and entertainment outfit Universal, has outbid Twenty-First Century Fox (NASDAQ:FOXA) for European pay-TV giant Sky, prompting Comcast stock to plummet on the news.
The deal keeps both companies jointly shielded from the combination of Fox and Walt Disney (NYSE:DIS) before the two rivals have a chance to fully communicate their merger, which was approved by Disney’s shareholders in July.
The wrinkle: Fox, soon to be entirely owned by Disney, already owns 39% of Sky, leaving owners of Comcast stock unclear as to the potential fiscal upside. Comcast may be in control, but its growth initiatives would be bolstering its competitor’s bottom line. Some observers expect Disney/Fox to sell its stake in Sky to Comcast, if only to defray some of the net cost of its recent dealmaking.
Regardless of what Disney/Fox does from here, the already-debt-laden Comcast has just made a huge bet that it’s going to be able to produce a big-time return on an expensive investment.
The magic number is $39 billion. That’s how much Comcast offered for the 61% of Sky that was up for grabs, topping Fox’s bid by a little more than 5%. For perspective, Sky generated £13.6 billion in revenue over the course of the past four quarters, turning £815 million of it into net income. The top and bottom lines continue to grow reliably, even if not at a red-hot pace.
Sky shares were up about 9% on the news, moving closer to the winning bidder’s offer of £14.75 per share ($19.28), but the Comcast stock price was off to the tune of 7%, indicating that most of Comcast stock holders feel it paid too much.
And it may have. Hargreaves Lansdown senior analyst Laith Khalaf commented:
“Looking at the stock price before the first Fox bid, it’s hard not to come to the conclusion that either the stock was woefully undervalued by the market, or is much overrated by the latest bid,” adding “Comcast now needs to demonstrate to its shareholders in the coming years that this deal was worth it.”
Technology and media analyst Paolo Pescatore believes the cable and entertainment giant will first focus on “integration with minimal impact on the business,” though he also expects “some cost-cutting measures.”
Pescatore does acknowledge the potential of the pairing:
“There are significant growth opportunities in Europe. The combined entity will be a considerable force. Sky and its customers will benefit from being part of the wider group, access to more services, products and features, financial security to some extent to bid for key costly premium content rights — in particular sports which is arguably the company’s prized asset with the Premier League.”
The deal will also help Comcast fend off an increasingly-tough OTT competitor Netflix (NASDAQ:NFLX), as well as other over-the-top television service providers.
Comcast’s Loss Is Disney’s Gain
It’s not a stretch to suggest Comcast wants 100% of Sky, nor is it a stretch to suggest Disney/Fox would be glad to shed its 39% stake in the company.
Bernstein analyst Todd Juenger notes “This weekend’s outcome of the bidding war for Sky was, in our view, the best possible result for Disney. 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 [direct to consumer] strategy.”
Juenger goes on to say the following:
“What does Disney lose? Arguments include: a) ‘jump start’ of 23mm satellite/2mm OTT subs in Europe; b) becoming a leading sports TV provider in Europe (and, all put together, nearly global); and c) rights to its own content currently licensed to Sky for years to come. In our view none of these are vital to Disney’s DTC entertainment strategy.”
Either way, Juenger agreed with other observers that Comcast has one huge task ahead. That is, it needs to explain to Comcast stock holders “why Sky is worth $21.1bn more to Comcast than the market said it was worth on its own (with little to no obvious synergies).”
Meanwhile, Comcast is reportedly willing to talk about the sale of its 30% stake in Hulu to Disney, which would make the Disney/Fox duo a 90% owner of the Netflix rival. That overture could be used as a bargaining chip if and when Fox chooses to talk about the sale of its piece of Sky.
Bottom Line for Comcast Stock
On the one hand, while the knee-jerk selloff from Comcast stock indicates the market doesn’t see enough upside given the hefty price paid for Sky, the potential synergies of the merger shouldn’t be completely ruled out. As always, if the integration is managed well and marketed properly, the combined companies could build something competitive.
On the other hand, this wouldn’t be a completely seamless integration. Aside from completely different geographies and cultural nuances, and aside from access to content from NBCUniversal, there’s not a great deal that Comcast can do for Sky that Sky couldn’t do for itself … and vice versa.
Of course, Comcast’s 2011 acquisition of NBCUniversal was criticized at the time for being too expensive as well, but it’s worked out nicely. Never say never.
Even so, it could take years for owners of Comcast stock to realize the full potential of this pairing.
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.