July 24, 2018

Sky High!!

Round 2 - Disney vs. Comcast

Thursday July 19, 2018 was the day that Comcast dropped out of the bidding war for the entertainment assets of 21st Century Fox. While the news is great for Disney, in its statement of withdrawal, Comcast declared that it will now focus on securing its offer for Sky, the largest European Pay-TV broadcaster, a prized asset coveted by both Comcast and Disney.

Yes, round 1 in the Disney/Comcast battle for 20th Century Fox assets went to Disney. However, Comcast forced Disney to pay a 36% premium (an additional $18.9 billion) for these assets. Was Comcast’s $65 billion bid for Fox merely a move to soften up Disney making it easier for Comcast to wrest Sky from the clutches of Disney/Fox? Or will Disney look to aggressively push Comcast out of the European marketplace?

Background
Sky PLC is a UK-based satellite telecom service that provides television, broadcast, and internet services to the UK, Italy, Germany, Austria, and Ireland. With a subscriber base of close to 23 million, Sky is the largest legacy pay-TV company in Europe. Currently, 20th Century Fox controls 39% of Sky, and has been making efforts since 2010 to control 100% of the business.

Now that Comcast has walked away from the bidding for Fox, Disney, by default, will own 39% of Sky with the other 61% up for grabs. Currently, Comcast has bid $34 billion for the remaining 61% of Sky, a 5% premium over the Disney blessed Fox offer.

What Happens Next
Disney will not make any moves related to Sky until July 27th, the date when its shareholders will approve the acquisition of 20th Century Fox. Once the deal is approved, there are 2 scenarios that are likely to play out:

Scenario 1 – Bidding war: Disney decides to outbid Comcast for the remaining 61% of Sky, likely setting up a bidding war.
Scenario 2 – Disney walks away from Sky: Disney decides to let Comcast’s $34 billion bid for the 61% of Sky go through and sell its additional 39% of shares to Comcast. By selling its 39% share to Comcast, Disney will be able to offset some of the premium it paid for Fox’s Entertainment assets.

Situational Analysis
TDG has consistently and accurately predicted that Disney would ultimately end up with the assets of 20th Century Fox entertainment. In order figure out who will come away with Sky, we will employ the same logic we used in the 20th Century Fox analysis.

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 again look at the value of Sky to both Comcast and Disney.

Comcast
Comcast finds itself in a position of lacking domestic growth opportunities where most of its distribution currently occurs. Acquiring Sky would increase its footprint to include five key European countries. Also, Comcast would 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.

Owning Sky would also provide Comcast with technology in the form of a high-end set top box called Sky Q and quality content, most notably Premier League soccer as well as a portfolio of high-end original TV content.

Disney
Disney’s CE0, Robert Iger described Sky as a “crown jewel”. Disney believes that ownership of Sky will enable it to immediately grow its user base in Europe and accelerate its transition to a direct-to-consumer (DTC) business.

By 2019, Disney plans to have 3 active streaming services in the domestic US market; an ESPN-branded sports service, a family-oriented TV and movie service, and Hulu, where Disney plans to distribute more adult-themed content. With Sky in its portfolio, Disney would use the Sky Now streaming service to distribute content across Europe. Without Sky, Disney would be forced to establish a European streaming distribution service from scratch.

So, What Happens?
Most analysts believe that Disney will just walk away, sell their stake in Sky to lower their outlay for the Fox acquisition, and build their European streaming service from scratch. TDG does not believe that this scenario will play out unless there is already a backroom deal to split the assets of Fox. The fact that Comcast forced Disney to pay an $18.9 billion premium for the 20th Century Fox entertainment assets is fairly compelling evidence to prove that an agreement had not been completed.

TDG believes Disney will raise its bid for Sky for the following reasons:

  • Buying an established streaming service in Europe is important as 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.
  • A Sky acquisition will also give Comcast an established business that will fuel its future growth.
  • A Sky acquisition will keep Comcast relevant in the media landscape.

Conclusion
At the end of the day we believe that Comcast will likely 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 two 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 offer entered 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.

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