May 29, 2018

“Déjà vu All Over Again”

Comcast set to Renew Quest for 20th Century Fox Assets

For those that believed that war between Disney and Comcast over the 20th Century Fox assets was settled in the fall of 2017 never learned the lesson of the famous Yogi Berra quote, “It ain’t over til its over.” In the fall of 2017, Rupert Murdoch chose Disney’s lower bid for Fox primarily out of fear of greater regulatory concerns should Comcast be the chosen suitor. After recently outbidding and potentially defeating Disney for Fox’s Sky TV, Comcast publicly announced that it would once again bid for Fox, but if and only if the AT&T Time Warner merger were approved by the courts. The decision on that case will occur on June 12, 2018.

What are the implications of a renewed Disney-Comcast bidding war, and who wins and why?

Why is Comcast so interested in FOX?
The primary reason that Comcast is interested in Fox is the need for vertical integration. The cable business in the US is in decline, and Comcast knows that the future of TV is streaming. The diversification of distribution platforms is critical to its future financial stability, and while taking control of Hulu would be a big win for either Disney or Comcast, adding the content assets of 20th Century Fox to NBCU would make Comcast an overnight leader in quantum content and distribution.

As discussed in the recently published TDG report, Thoughts on the Future of TV- The State of Quality Content, there are 3 main catalysts behind the shift from traditional to quantum video: the maturation of the Millennials, technological advances (including the distribution of broadband to over 100MM US households), and the permissive M&A environment. Comcast and other companies looking for potential acquisition targets have realized that, and except for the AT&T-Time Warner merger, other media deals have either sailed through or will likely pass government scrutiny with little or no resistance. Assuming the AT&T-Time Warner merger makes its way through the courts, Comcast and Fox calculate that the regulatory concerns for a Fox acquisition are not as great as once anticipated.

Looking at the offers – Which deal is better?
Disney has offered Fox $52.4 billion in Disney stock for most of the assets of 20th Century Fox, including all entertainment assets except the Fox Broadcast Company, including its 28 owned stations, Fox Sports, Fox Sports 1 & 2, Fox Deportes, and the Fox Studio lot located in Los Angeles. Annual revenue for this new entity is estimated to be in the range of $10 billion.

The rumored bid (there is no official bid until June 12th) by Comcast pays Fox $60 billion all-cash for the same assets that Disney wants to acquire.

On paper, $60 billion in cash is preferable to than $52.4 billion in stock. Then again, many argue that the synergies between Fox and Disney are greater than the sum of its parts, and that the Disney stock is in reality undervalued. If so, Fox should think twice before rejecting Disney’s bid.

Who will win this bidding war (if there is one)
While Disney, Fox, and Comcast are all run by savvy executives, meaning a very competitive bidding process, it will be market forces that determine the outcome of this battle.

  • In a a contentious bidding war, the only winner will be Fox shareholders. Otherwise, the result will be two wounded companies with one paying a very high premium for an asset unworthy of the price. (It is usually the employees that pay the biggest price for a bidding war, as greater layoffs are bound to be part of the strategy to offset the cost of the purchase of Fox.)
  • Disney is rumored to be working on a strong pre-emptive counter offer for Fox, in an attempt to head-off Comcast’s planned bid.
  • There are limitations to the amount of money that Comcast could reasonably pay for Fox, because at a certain point Comcast’s debt would be downgraded. While the same goes for Disney, it has a much cleaner balance sheet.

Likely outcomes

  • COMPROMISE – Neither Comcast nor Disney want a long protracted bidding war, and the trial balloons floated by Comcast may be a way to get Disney to back away from Sky in exchange for Comcast staying out of a bidding war for the rest of the Fox assets. Other assets may be in play assuming Disney wants to secure the Fox deal by compromising with Comcast.
  • DISNEY Wins – Disney has a slight edge over Comcast in terms of what it can offer to Fox in terms of price. 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.

Longshots

  • Comcast Wins – The only way this scenario plays out is if Disney chooses not to counter-offer the Comcast bid, and Fox calls its bluff.
  • The Courts block the AT&T-Time Warner Merger – All signs point to the merger going through, but we live in a very unpredictable political environment, so the uncertainty is palpable.
  • A Mystery Suitor – A third suitor could join the bidding for Fox.

Conclusion
There is a very high likelihood that the courts will approve the AT&T-Time Warner Merger on June 12, triggering the Comcast bid for the FOX entertainment assets. Even with a higher bid by Comcast, the odds still favor a Disney counter offer and retaining the upper hand to acquire the entertainment assets of 20th Century Fox. However, it would be prudent for Disney to strike a compromise agreement with Comcast to avoid a protracted and expensive bidding war. Should Disney choose to compromise, the price will likely be steep, but paying a price for certainty is preferable to engaging in an all-out bidding war, with uncertain results.

For those surprised by the avalanche of recent high-profile M&A activity, this may in fact be only the tip of the iceberg. Larger players are looking to ensure their future relevance by vertically and horizontally integrating with other dominant brands. On the other hand, small-to-mid size players are thinking twice about whether exit strategies, as they increasingly find themselves unable to compete with more fully integrated behemoths.
Regardless of size, all media companies have to rethink their strategies. It may be time to reconsider taking the fork in the road or risk becoming irrelevant.

 

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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