June 20, 2018

The Battle of Disney vs. Comcast for FOX

Post AT&T-Time Warner Merger

Last week, Judge Richard Leon ruled that AT&T can go through with its $85.4 billion purchase of Time Warner, without condition. This should be looked upon as a watershed moment for the future of television. The clarity of this decision will likely encourage a significant wave of M&A activity. The first M&A shoe to drop was Comcast’s renewed $65 billion all cash bid for the assets of 20th Century Fox on June 13th, one day after the AT&T decision was announced.

While TDG accurately predicted Judge Leon’s decision, and more and more analysts are now drawing the same conclusions that TDG had forecast weeks ago, the decisiveness of the ruling warrants a closer look into the likely outcomes of the potential bidding war between Comcast and Disney.

Where We Are Now
At the time of publication, Disney announced a $71.3B offer for FOX up from its original $52.4B to counter Comcast’s most-recent bid of $65 billion. Disney’s bid which includes up to a 50% cash component is designed to dissuade FOX from seriously entertaining the all-cash Comcast offer. Fox shareholders will decide whether to accept their payment in cash or stock.

Ramifications of An All-out Bidding War
If Disney and Comcast enter a more intense bidding war (it has already begun), the only winners will be Fox shareholders and media rivals such as Netflix. The result of a bidding war will be two wounded companies with one paying a very high premium for an asset unworthy of the price, and the other company walking away with nothing.

Who Can Bid More for the Fox Assets?
Both Disney and Comcast have similar market caps ($159.6B vs $149.9B, respectively), but their balance sheets tell another story.

By raising its offer to $71.3B, Disney knows that Comcast will be limited in the amount of money that it could reasonably counter offer. According to its Q1 cash flow statement, Comcast only has $6B on the books, and thus would have to run up its debt (including $20B in Fox Debt) to unprecedented levels to make this acquisition.

Should Comcast counter Disney’s $71.3B offer, they do so with the knowledge that Disney has a cleaner balance sheet and can potentially pay even more for Fox if it so chooses. Comcast may be at the point where there is no turning back and if so, this mild bidding war may get out of control.

A Bidding War – Who Wins?
A simple way to predict the winner of a bidding war is to look at (1) the organization that needs the asset most, and (2) which has the deeper pockets. Since we know that the market caps and ability to bid for Fox are relatively equal, and both companies have relatively equal desire for the Fox assets, one can predict a very expensive and pyrrhic victory for one the winner.  However, this mutually assured destruction sets up a ripe field for compromise since there is a consensus that certain assets are coveted by Disney more than Comcast and vice versa.

Disney Wins – Disney has a slight edge over Comcast in terms of what it can offer to FOX in terms of price due to its cleaner balance sheet. As well, Disney has promised James Murdoch a senior executive role at Disney, enabling Rupert a clear succession plan with Lachlan ultimately running the “New Fox” organization.

Comcast Wins – The only way this scenario plays out is if Comcast goes extremely deep into debt and outbids Disney, who ends up with a much cleaner balance sheet.

Should the Disney or Comcast scenarios happen, the biggest winners will be FOX shareholders and streaming rivals, primarily Netflix. The highest bidder can claim victory, but it comes at a high cost.

Compromise Scenario

Disney gets – TV production, film & TV operations, additional 30% of Hulu

Comcast wins – International distribution (primarily Sky)

Should a compromise scenario happen, all three companies can claim victory.

A Mystery Suitor – A third suitor could join the bidding for Fox. Companies like Facebook, Apple, Amazon, Google, and Verizon have all been rumored to be considering bids, but nothing has come to light, and it may be too late in the game for them to get involved.

Based on the $71.3B offer by Disney, TDG now feels that the most likely scenario is that Disney wins this war, but a compromise could still be worked out to prevent bidding from getting out of control.

Conclusion
With the AT&T-Time Warner merger now on the books, the odds favor Disney retaining the upper hand to acquire the entertainment assets of 20th Century Fox. Based on the $71.3B offer by Disney, TDG now feels that the most likely scenario is that Disney wins the day, but a compromise could still be worked out to curtail a protracted, expensive and out of control bidding war. It is not out of the question that Comcast raises their offer for Fox, a fate that Disney is hopeful does not happen.

Finally, the odds of a 3rd party entering the bidding for Fox is greater than it was a few weeks earlier due to the AT&T decision. Judge Leon’s ruling has lowered the probability of government challenging mergers, but TDG feels that a 3rd suitor entering the bidding at this late date is a longshot.

We have only seen the tip of the iceberg when it comes to M&A activity in the age of quantum video. Companies that do not get big enough risk economic failure, and thanks to Judge Leon, the activity is only going to accelerate as more and more companies see M&A as their path to economic survival.

A 20-year veteran media executive, Rob Silvershein’s success in today’s competitive media environment is a direct result of his unique experiences spanning traditional, emerging, and startup media platforms. He is an accomplished strategist and spends most of his time advising media companies on how to structure themselves for long term success. He currently lives in Manhattan Beach, CA.

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Last week, Judge Richard Leon ruled