August 15, 2018

Preparing for War!

Last week, 20th Century Fox formalized its $32.5 billion bid to acquire the remaining assets of Sky TV. This did not exceed Comcast’s $34 billion proposal but does represent a 30% increase over its previous offer. Under British takeover rules, Fox will have until September 22nd to make a final offer.

Several weeks ago, TDG projected that Comcast will ultimately end up acquiring the remaining 61% assets of Sky at a premium price. Based on the current moves made by both Disney/Fox and Comcast, we see no reason to change our projection, but the edge is now razor-thin. What we did learn this week is that Disney is not going away quietly. Whoever ends up with Sky will ultimately pay a hefty premium.

Signs of a Continued Bidding War

The Markets
The first piece of evidence of a brewing bidding war is to check the markets. Looking at the London Stock Exchange, Sky hit an 18 year high in mid-July, and continues to hover around that level.

CEO Sentiments
Disney’s CEO, Robert Iger described Sky as a “crown jewel”. Disney believes that ownership of Sky will enable them to immediately grow their user base in Europe and accelerate its transition to a direct to consumer (DTC) business. At their most recent earnings call, Bob Iger reiterated their excitement of gaining 39% of Sky and how the Fox assets will enhance their position as a global entertainment company.

Comcast’s CEO Brian Roberts also called Sky a “jewel”.  Acquiring Sky would increase the Comcast footprint to include five key European countries. Comcast would also acquire Sky’s streaming OTT service, Sky Now, which offers Comcast compelling video distribution services options, something that Comcast lacks in its current portfolio of businesses.

Other Moves
Disney is pulling out all stops to keep Sky’s Management Team in place by offering them a lucrative stock package if Fox beats Comcast in the bidding war. Comcast has also expressed its desire to keep Sky’s management in place, but without any details made public.

In order to make a higher bid for Sky more acceptable, Fox changed the terminology of their bid from an “arrangement” to an “offer”. This subtle change lowers the threshold for an offer to be accepted by its shareholders from 75% to 50%.

What Happens Next?
By formalizing its bid and not increasing price, Fox triggered a 46-day waiting period where either party can raise their offer price. The offer period ends on September 22. If there is not a clear winner by 9/22, then a five-day auction process to determine whose offer will be recommended to shareholders will commence.

Situational Analysis
TDG still feels that the easiest way to determine who will end up with the 61% of Sky is to determine who wants/needs the asset more, and who can afford it. Let’s take a fresh look at any changes to the value of Sky to both Comcast and Disney.

Comcast
Comcast announced its Q2 2018 earnings result late last month. Look no further than their quarterly profit as the rationale for Comcast to stay in the bidding war  for Sky Plc.

In Q2, 2018, Comcast lost 140,000 pay-TV subscribers in the quarter. The loss was offset by a net gain of 260,000 high speed internet subscribers, more evidence that people are moving to streaming video services and are moving away from traditional Pay-TV (as TDG has predicted for years). Comcast will likely place an even bigger premium on the Sky Now OTT Streaming Service.

Disney
Disney has remained relatively quiet about their plans for Sky. Publicly, it has not revealed whether they will top Comcast’s offer. By acquiring the entertainment assets of 20th Century Fox for a premium, and having a good earnings report in their Fiscal Q3, Disney is riding high. Disney has not signaled if they will approve Fox raising its bid for Sky beyond the $34 billion threshold.  They have the momentum to do so, but is it a wise business decision to pay so much for Sky?

Conclusion
TDG believes that Disney/Fox will raise its bid for Sky for the following reasons:

  • Buying an established streaming service in Europe is important because Disney has a track record of poor results when it comes to launching digital businesses on its own.
  • Winning the bidding for Sky pushes a worthy rival, Comcast, out of the European streaming Market.

TDG also believes that Comcast will aggressively counter any Disney bid because:

  •  A Sky acquisition will give Comcast a much-needed European footprint. It will also give Comcast an established streaming business that will fuel its future growth.
  • A Sky acquisition will keep Comcast relevant in the media landscape.
  • Sky is primarily a service provider, selling TV, internet, and phone service to retail customers.  However, it also owns content, including the rights to Premier League soccer. Sky is just a better fit for Comcast.

At the end of the day TDG believes that Comcast will end up acquiring the assets of Sky, but like Disney-Fox, the assets will be purchased at a significant premium. We believe this scenario plays out for 2 reasons:

  1. Comcast needs Sky more than Disney needs Sky.
  2. The gamble that Brian Roberts took to force Disney to pay the additional $18.9 billion for Fox turned out to be a good one, because it limits Disney’s ability to counter an aggressive bid by Comcast.

It should be noted that the margin for error for our projection is quite slim. Any misstep by Comcast could turn the tide in favor of Disney.

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.

Sign Up for Weekly Analyst Insights


Recent Insights

(c) Can Stock Photo / tashatuvango
August 21, 2018 // Brad Schlachter OTT Monetization: Neflix’s Model is Not for Everyone

With Netflix’s impressive growth and a

August 15, 2018 // Rob Silvershein Preparing for War!

Last week, 20th Century Fox formalized

August 2, 2018 // Rob Silvershein Principle over Politics

In a surprise, yet principled decision,