Comcast has made a formal offer for Sky, valuing the UK-based satellite operator at £22 billion ($30.7 billion). Today's official offer of £12.50 represents a premium of more than 16% over 21st Century Fox’s offer for the 61% of Sky it does not own. Sky's independent board of directors has this morning withdrawn its recommendation of the Fox bid, making a battle for ownership of Sky between Comcast, Fox and possibly Walt Disney Co, seemingly inevitable.

US cable giant Comcast unveiled a possible takeover offer for Sky in February, gatecrashing the 21st Century Fox offer for 100% ownership of Sky made in December 2016. The completion of that agreement has been delayed by the UK government's decision to refer it to UK regulators over concerns on the plurality of ownership.

The Competition and Markets Authority (CMA) is due to report its final decision next week. The CMA provisionally ruled against approving the takeover by Fox because of the links to the Murdoch family's UK newspapers, but may be moved to change its ruling by the proposals over the ownership and funding of Sky News made by Fox last month. In December last year, Walt Disney Co agreed to buy most of the entertainment assets of Fox, including its existing 38% stake in Sky.   

Comcast has made sure its bid is as digestible as possible for UK regulators, stating that it will maintain annual expenditure on Sky News for ten years, establish an independent editorial Sky News board and maintain Sky’s UK headquarters in Osterley west of London for five years. Its cash offer is conditional on acceptance by 50% plus one share of voting rights.

Our analysis

With the Sky share price rising above £14, observers are expecting a bidding war now that Comcast has formalised its challenge to the Fox offer of £10.75 a share. While Comcast - already present in the UK via its NBC Universal unit - does not throw up the same regulatory concerns as Fox, the success of the takeover will be determined by which company is prepared to offer the most money. It is also possible that Fox, after its lengthy battle to gain control of Sky, might be tempted to give way to Comcast now the US cable giant has put its money on the table.

What view the Walt Disney Co will take remains unclear. The company agreed to acquire Sky News in order to clear the way for the Fox takeover, suggesting that it might be interested in adding a fully-owned Sky to its empire - even though, in IHS Markit's opinion, Sky looks like a better fit for Comcast than Disney, which has a limited business distributing third party channels (apart from Hulu and, from this month, ESPN Plus). Reports that Comcast may still be contemplating a bid for the Fox entertainment assets add another possible layer of complexity to negotiations.

The bid is a logical next step in the evolution of Comcast, which has a history of growing the company through mergers. Expanding outside the US is a strategic move which will help the company hedge itself against its declining video business in the US. Programmers like NBC Universal got onboard with the strategy earlier on, and for different reasons; however, that doesn’t detract from the fact that expanding into Europe will be a good move for the company.

Unlike the US there is no expectation of a contraction in the number of pay TV subscribers in the UK. Aggregate pay TV subscriptions are forecast to grow at a 0.5% CAGR from 2017 to 2022, while across the pond they are expected to decline at a -1.8% CAGR in the same period. By purchasing overseas assets Comcast is shoring up its video business.

The vicious circle in the US of increasing carriage fees leading to increased pay TV ARPU, which leads to cord-cutting, isn’t present in the UK. The move into the UK market is good for Comcast shareholders, while the impact on existing Sky subscribers should be minimal as the company will likely keep operating the Sky unit as usual for at least five years – if the purchase is approved.

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