Market Insight

Comcast wins Sky battle with £30.6 billion offer

September 24, 2018  | Subscribers Only

Tim Westcott Tim Westcott Director – Research and Analysis, Programming, IHS Markit

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Comcast has outbid 21st Century Fox to win control of Sky, with an offer valuing the UK-based pay TV group at £30.6 billion ($40 billion).

In the third and final round of the auction run by the UK's takeover panel on Saturday 22 September, Comcast made a final offer of £17.28 per Sky share, trumping a bid of £15.67 from Fox. Comcast launched its challenge for Sky in April with an initial offer of £12.50, valuing Sky at £22 million. Sky shares closed at £15.85 last Friday.

Sky shareholders now have until 11 October to accept Comcast's offer. The US company's offer is conditional on acquiring at least 50% plus one share of Sky. The independent directors of Sky unanimously recommended the Comcast offer on Saturday. Fox, which has a 39% stake in Sky, said it was considering its options and would release a statement about its intentions soon.

Comcast, meanwhile, said it was hoping to complete the acquisition by the end of October. 'This is a great day for Comcast’, said the US company's chief executive Brian Roberts. 'Sky is a wonderful company with a great platform, tremendous brand, and accomplished management team.'

Our analysis

Barring another twist in the long-running saga of Comcast’s takeover battle with Fox over Sky, the US cable company is set to make a transformative acquisition which will, at a stroke, double its international business. The takeover deal also involves a third major media group, the Walt Disney Company, which is in the process of acquiring most of Fox’s assets, including its stake in Sky. The deal has significant ramifications for all of these companies.

Comcast

The US cable group was keen to make another major acquisition, plotting to bid against Disney for the Fox assets until deciding to focus on the Sky acquisition in July. In bidding 10% more than Fox for Sky shares, Comcast showed its determination not to let the deal slip through its fingers. The company will take on a significant debt burden whose size—at the moment—is unknown. When its offer for Sky was at £12.50, Comcast management were talking about a level of debt at three times EBITDA.

Comcast sees the combination of its customer base of 29 million with the 23 million of Sky as offering not just an increased international footprint (25% of revenues rather than 9%), but also increased scale to enable it to develop and launch new products. Comcast management likes Sky’s newest Q set-top box and Brian Roberts even said it had ‘spent the last three years’ looking at the platform. 

Comcast has a long-established business in the UK through NBC Universal, employing 1,300 staff and having invested more than $1 billion in film and TV in the UK over the last three years. Launching its bid for Sky in April, Comcast said it would maintain Sky’s Osterley campus west of London, and continue to support its content creation, its Sky News channel, and other initiatives. 

While the company describes Comcast and Sky’s market positions as ‘complementary’, there is some overlap on the channel and programme distribution side. While CNBC, as a business news network, is complementary to Sky News, there is clearly some room for merging the company’s studios and news bureaux. Meanwhile Sky’s burgeoning content distribution arm, Sky Vision, would seem most likely to be brought under the roof of NBC Universal.

Sky

While Sky was never consolidated into 21st Century Fox, the company provided strategic direction, with the other shareholders being institutional investors happy to allow Fox to call the shots while watching their shares increase in value (shares closed at £7.69 the day before Fox launched its bid to take full control of Sky in December 2016). The probable dissolving of links between Fox and the Murdoch family and Sky will certainly be the end of an era. In the early days of Sky, the losses of the satellite venture almost led to the collapse of the whole Murdoch empire—a sign of the vital importance of the nascent business to its future.

The Murdoch links to Sky were somewhat diminished in recent years by the splitting-off of its newspaper assets—though the links remained material enough to put the Fox bid into limbo as the UK government asked regulators to scrutinise the deal.

For Sky, a new shareholder will therefore inevitably mean a change of culture. In the core pay TV business, however, it is hard to see Comcast seeing the need to make changes in the way it operates. Comcast management also cited Now TV, the standalone pay TV product which Sky has successfully introduced to offset the lack of growth in its core satellite business, in favourable terms. Sky has also used the Now TV platform to expand into new markets in Spain and Switzerland.

Apart from the possible consolidations in news and content distribution mentioned above, Sky has also made other investments in start-ups like the OTT platform Iflix in Asia, FuboTV in the US and virtual reality producer Magic Leap. This seed funding activity could also be brought within Comcast.

Walt Disney Company

Having already agreed to buy Fox assets including the 39% stake in Sky, Disney was a more than interested party in the auction. CEO Robert Iger described Sky as a ‘crown jewel’, suggesting that the pay TV platform could have been integrated into the Burbank-based company’s empire, along with the Fox movie and TV studios, cable networks and stake in Hulu.

Disney will still have achieved the objective of swelling its content library with the Fox assets as it prepares to launch a direct-to-consumer service to compete with Netflix later this year. Sky would have taken it further down the road of operating platforms in addition to creating and exploiting content. Disney will still become the majority partner in Hulu, with Comcast owning 30%, and will own the Star India business (including a pay TV platform). Disney already has the ESPN+ standalone subscription product in the US as well as streaming specialist unit BAMTech. 

If Fox opts not to sell its shares in Sky, Disney could still remain on board when the Fox deal is complete. However, many commentators think Fox is likely to accept Comcast’s cash rather than become a minority partner in a company controlled by a studio rival.

Fox

In the end, Fox lost out in its game of chicken with Comcast, with a significant difference in value between the final bids by the two companies. The extent to which Disney influenced the bidding is not known. In any event, Comcast was prepared to raise its valuation of Sky by a total of £8.6 billion, going further than Fox (and possibly Disney) were prepared to go.

Once its studio assets are sold to Disney, Fox will comprise the Fox network and broadcast stations in the US, as well as the Fox-branded sports, news and business cable channels. This seems like a niche set of assets to have at a time when US media companies in particular are looking to increase scale and broaden their range of activities. They could be sold off (Warner Media and Sony do not own a network) or form the basis for a new media empire based around news and sports which, unlike the stock in trade of SVoD services, are mostly watched live rather than time-shifted. Fox will, however, also have shares in Disney and, probably, a considerable pile of cash from Comcast. 

 

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