Market Insight

Comcast intends to outbid 21st Century Fox for ownership of Sky

February 27, 2018


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US cable giant Comcast has unveiled a possible takeover offer for Sky, aiming to outbid 21st Century Fox. Comcast today made an all-cash offer of £12.50 per share for the UK-based satellite operator, which represents a 16% increase on 21st Century Fox’s offer, implying a valuation of £22.1 billion ($28.5 billion). Fox, which already owns a 39% stake in Sky, offered £18.5 billion ($23.8 billion) to acquire the shares in the operator that it does not own. 

Comcast is already present in the UK with NBCUniversal, which it says has more than 1,300 employees in the country. The company said it would maintain Sky's UK headquarters in Osterley, west of London, increase its investment in film and TV production in the UK, and maintain Sky News and its 'strong track record for high-quality impartial news and adherence to broadcasting standards'.

The 21st Century Fox offer for Sky was accepted by shareholders in December 2016, but is still awaiting approval from UK regulators. The Fox stake in Sky is also one of the assets that Walt Disney agreed to acquire from Fox in December last year.

Our analysis

Comcast has yet to make an official bid for Sky, announcing a 'possible' offer this morning priced at £12.50 per share - a premium of 16% compared to the £10.75 per share agreed with Fox last December. The offer is also 13% above the Sky closing price on 26 February - although today’s news has already pushed Sky’s share price above £13. Brian Roberts, Chairman and Chief Executive Officer of Comcast, said the company 'would like to own the whole of Sky and we will be looking to acquire over 50% of the Sky shares.' 

With offers from Fox and Walt Disney already on the table, it is expected that Comcast's offer will spark a bidding war for Sky, the leading pay TV company in Europe with 23 million customers across seven countries. Comcast also considered an offer for the 21st Century Fox assets last year but pulled out, stating that it 'never got the level of engagement needed to make a definitive offer'.

21st Century Fox’s own bid for Sky has been delayed by a government referral to the UK’s Competition and Markets Authority (CMA) on the grounds of media plurality. The CMA provisionally found in January this year that the combination of assets, and in particular its news reporting assets, would not be in public interest. In response to concerns raised by the CMA, Fox last week proposed to run a fully independent board for Sky News, and to commit to funding the network for a minimum of five years.

Comcast’s emphasis on maintaining and investing in its UK business, as well as its commitment to the Sky News brand, looks like a clear message to UK regulators that it would not pose the same plurality concerns as Fox. Of course, a hypothetical offer will not have any bearing on the CMA process, so the message could also be directed to Sky shareholders losing patience with the long-drawn out deliberations. 

The Sky business looks like a better fit for Comcast than Walt Disney, which has no existing distribution activities apart from Hulu and would seem to be far more interested in the film studio and cable network divisions of Fox. By taking Sky out of the equation, Comcast would reduce the overall cost of the deal as well as removing the regulatory headache. Comcast’s stake in Hulu, as well as future supply deals with Sky for Fox and Disney, could prove to be a bargaining chip. 

A Comcast acquisition of Sky would also cement the UK operator’s strategy as a multiplay provider, potentially making a divestiture of Sky assets less likely. On the other hand, Comcast’s relative attractiveness to Sky shareholders may throw a spanner in the works for Disney’s interest in synergies between its own TV services and Sky’s. Whichever direction the battle for Sky goes, the implications for Sky of the sale of Fox assets to Disney will be interesting to see.

The purchase of Sky would represent a major international expansion in the pay TV sector for Comcast, putting it head-to-head with US-based cable player Liberty Global.  As at the end of 2017, Comcast claimed a total of 22.4 million pay TV subscribers. The addition of Sky’s 22.7 million-strong TV base in Europe across pay TV and OTT would create a combined entity with almost twice as many subscribers as Liberty’s 23.4 million, and would be second only to Netflix in terms of global subscriptions. Sky has also begun expanding across Europe via OTT offerings, with recent launches in Spain and Switzerland, which would allow Comcast to leverage Sky’s burgeoning European expansion plans to form an international operation that could rival the growth possibilities of the major OTT players.

The combination of two of the world’s largest pay TV operators is likely to cultivate innovation across regions. Sky has long been seen as a market leader in new technology and services, and more recently has been investing heavily in original content. Sky built its strong subscriber base in the UK through premium sports acquisitions and first window movies, and has seen competition intensify over the past years with rival BT’s entry into the premium sports market and the launch of online video services offering original productions.

In response, Sky is to fund 50 original productions in 2018, and has committed to spend £7 billion on content this year, including premium sports, movies and HBO content. Meanwhile, Comcast has increased its own interest in content over the past years, acquiring NBCUniversal in 2011 and DreamWorks Animation for $3.8 billion in April 2016. However, while there are potential content synergies from the combined footprint of the two parties, it is also likely that Comcast’s interest in Sky stems from a technological standpoint, with the opportunity for the group to exploit synergies between its Xfinity product and Sky’s Sky Q offering.

A Comcast acquisition of Sky provides further opportunities in the multiplay sector. The UK is Sky’s most developed market, with high penetration for broadband, delivered via BT Openreach (and a small venture with CityFibre), alongside their DTH business. Sky is the second largest fixed line operator in the UK market with some 6.7 million broadband subscribers and 6.3 million fixed voice subscriptions.  This has been buoyed further by the launch of their mobile business, an MVNO arrangement which reached around 335,000 subscribers by the end of 2017, a year after launch. Sky has also has opened up multiplay offerings in Italy, using partnerships with both Fastweb and Telecom Italia to deliver full quad play offerings to consumers. Acquiring Sky will provide several options for Comcast, such as pursuing  further deals along the UK model that may see it leasing last mile infrastructure but managing networks directly, or using the more asset-light Italian partnership model.

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