The Hunt Is On

Comcast’s $65 Billion bid for certain 21st Century Fox assets wasn’t the “shock and awe” offer that many were expecting, but it solidified what everyone in the industry already kind of knew: Brian Roberts is dead serious about adding content scale.

Cover Story, June 18, 2018

Cover Story, June 18, 2018

Comcast’s chairman and CEO had in the past expressed interest in the Fox assets — cable channels FX, FXX and National Geographic; TV and movie production studio 20th Century Fox; 21 regional sports channels; and Fox’s 39% interest in U.K. satellite company Sky and 30% interest in online video pioneer Hulu.

In December, Comcast offered Fox about $34 per share in stock, a bid that was higher than the ultimate winner, The Walt Disney Co., but was rejected because of regulatory concerns and the lack of a breakup fee. In its new $35-per-share deal offered up June 14, Comcast has matched Disney’s $2.5 billion breakup fee and has offered to pay Fox’s $1.5 billion termination obligation, should it scuttle the Disney deal.

Comcast telegraphed in May that it was in the “advanced stages” of making a formal all-cash offer. The bid is expected to touch off a potentially bloody bidding war with Disney, which in December announced a deal valued at about $55 billion (not including assumed debt) for the same assets.

Disney has so far been silent on the Comcast offer, and Fox said last Wednesday (June 13) that its board of directors has received the proposal and will review it. The company has not decided whether it will need to cancel the July 10 special shareholders meeting to vote on the Disney proposal. That could perhaps be decided at a previously scheduled meeting of the Fox board of directors on June 20.

Related: Disney, Fox Set July 10 Special Meeting

While the Comcast bid is about 20% more than the Disney offer — but still short of the 25% or higher premium many analysts expected — Pivotal Research Group CEO and senior media and communications analyst Jeff Wlodarczak said a knockout offer would have probably driven Comcast stock into the cellar, and besides, Roberts may believe that Disney won’t be as aggressive as everyone thinks. Comcast shares were already down about 20% this year, mainly because investors feared Comcast and Roberts would do just what they did on Wednesday.

“Sentiment in cable is god awful and massively overdone in my view, which sets the table for significant short squeezes in both Comcast and Charter and Disney,” Wlodarczak  said. “Investors are pricing these names as if the world is falling apart, and Comcast is doing something incredibly stupid, which is simply not the case. Even if Comcast were to pay materially more — say $15 billion — the stock is still dirt cheap and there is logic to a deal.”

Comcast stock actually rose 4.6% ($1.50 each) to $33.82 per share on June 14, signaling that perhaps that sentiment is easing a bit.

Disney chief Bob Iger

Disney chief Bob Iger

Both sides are expected to fight hard for the assets. Disney chairman and CEO Bob Iger has said the Fox deal is a critical piece of his company’s overall direct-to-consumer strategy, giving the content giant more compelling programming and reuniting film properties in the vastly popular and profitable Star Wars franchise (Fox owns Episode IV: A New Hope, the initial 1977 film) and the Marvel Comics universe (Fox holds the film and TV rights to the X-Men and other characters). Iger is not one to back down from a fight, and both sides have the resources to sweeten their offers.

“Release the hounds. The Fox chase is on,” wrote MoffettNathanson principal and senior analyst Craig Moffett in a blog post.

In a conference call with analysts to announce the deal, Comcast focused a lot on its international aspects— it would boost international revenue from 9% of total sales to 27% — but that also could have been for regulators. While the business is truly becoming global, Roberts’s brief explanation of the state of the pay TV industry probably showed his own mindset the best. “We firmly believe that the truly great media companies of the next century will be large integrated entities with multiple growth engines across a wide swath of the global entertainment industry,” Roberts said.

NBCUniversal CEO Steve Burke, under whose purview the Fox assets, if acquired, would fall, said the deal reflects the changing landscape and Comcast’s willingness and ability to adjust to it.

“One thing we know for certain is that more video is being consumed across more platforms than ever before,” Burke said. “We think that will continue for years to come.”

Burke believes not only will the best companies create and broadly distribute their own content, they will sell it to a global audience. “The Fox assets will make us stronger,” he said.

Comcast's bid for certain 21st Century Fox assets is a sign that chairman and CEO Brian Roberts (pictured) is serious about snatching those businesses away from The Walt Disney Co.

Comcast's bid for certain 21st Century Fox assets is a sign that chairman and CEO Brian Roberts (pictured) is serious about snatching those businesses away from The Walt Disney Co.

On the conference call after the deal was announced, Roberts praised Fox’s ruling Murdoch family for its excellent stewardship of the assets, comparing Rupert Murdoch’s vision to that of his own father, the late Ralph Roberts, with both building media empires essentially from scratch. “We are, in our minds, the right buyer,” he said on last Wednesday night’s call.

Related: Murdoch Calls Disney Deal a ‘Momentous Occasion’

Both Comcast and Fox have grown their businesses by acquisition, but have taken slightly different tacks. Murdoch is famous for bidding way too much for content assets — like his offer for National Football League rights in the 1990s, which was $100 million higher than the next bidder but put the Fox broadcast network on the map, and more recently buying The Wall Street Journal at a 67% premium. Roberts has taken a more careful approach, seeking out troubled companies that could be snapped up for bargains and turned around quickly like AT&T Broadband and NBC Universal.

Roberts touted those past deals as proof that Comcast knows how to integrate large purchases. But AT&T Broadband was in trouble and managed poorly — the telco had concentrated on phone service while its video operation dwindled. And NBCU had a disinterested owner (GE), a fourth place broadcast network in a four-player field, and a slew of cable networks that were basically neglected. There was a lot of upside for an owner that knew had to run a pay TV business, and Comcast took full advantage.

That philosophy has served Comcast well. Since its IPO in 1972, the average return for Comcast shareholders has been 17.1% per year, Roberts said, far outpacing the S&P 500 Index. To put it more bluntly, $7,000 invested in Comcast stock in 1972 would be worth about $10 million.

“This is our formula, and I’m proud of our 45-year track record,” Roberts said.

But the Fox assets are not in trouble. There aren’t as many clear, major improvements that Comcast can make to boost returns as it did in its other mega-deals.

Related: Roberts Says Comcast Is the ‘Right Buyer’ for Fox

On the conference call, Burke acknowledged the Fox assets were different, but said there is ample room to grow. “[I]t’s more about complementarity; it’s about the fact that we’re very strong in distribution and content in the United States and not as strong in places like India and Europe,” he said.

But to service its new debt, Comcast will need big returns. If its current bid is accepted, the combined company’s overall leverage would balloon to about $170 billion, or about 4.25 times forward-looking cash flow, per Moody’s Investor’s Service. That is about twice its current leverage of 2.75 times, and could jeopardize its investment-grade rating — i.e., its ability to borrow cash cheaply.

The combined entities are expected to have enough free cash flow to repay debt maturities as they come due, which Moody’s said was “very important given the amount of outstanding debt, secular pressures on linear pay TV and slowing cable industry growth.” But the credit rating agency added Comcast’s willingness to increase leverage so much is “a major shift in financial policy.”

Roberts called the extra leverage as a result of the deal “temporary,” adding that his best answer to the debt service question is the performance of the overall business.

“We have a business plan and a momentum,” Roberts said. “With a changing world, we make adjustments.”

Analysts are split as to who may emerge victorious in this modern-day Fox hunt. Greenfield believes Comcast, smarting after backing off its bid for Disney in 2004 and abandoning its pursuit of Time Warner Cable in 2015, doesn’t want to lose a third time and will be very aggressive. Moffett believes if Disney can put together an attractive package of cash and stock, it could end up the victor. Wlodarczak believes Comcast needs Fox more than Disney, and therefore would do whatever it takes to obtain the assets.

But Moffett added that no matter which suitor comes up with the highest bid, there is only one true winner in the deal. “It’s good to be Fox,” he wrote.