The Sky’s the Limit!
What Comcast’s Bid for Sky is All About
Just when most experts thought that the Disney/FOX deal was about in the books, Comcast re-entered the picture, bidding $31 billion bid to purchase a majority stake in the British satellite company, Sky — a 16% premium over the offer made by Rupert Murdoch’s FOX. Because Disney had assumed that FOX would gain control of 100% of Sky as part of the acquisition plan, this surprise move by Comcast may have thrown the entire $66.1 billion Disney-FOX merger into peril.
What’s really going on here?
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 roughly 23 Million, Sky is the largest legacy pay-TV company in Europe. Currently, Rupert Murdoch’s 20th Century Fox controls 39% of Sky, and has been making efforts since 2010 to control 100% of the business.
Unfortunately for Murdoch, Fox has yet to gain 100% ownership mainly due to its own mis-steps. In 2011, Fox had to withdraw its bid for control of Sky due to public outcry over its involvement in a phone hacking scandal. In early 2018, the UK competition regulating board (OFCOM) was concerned that by allowing Fox to control 100% of Sky, the Murdoch family would have too much influence over the news and the political process in the UK. In order to satisfy the regulators and gain approval, FOX would need to find a satisfactory way to remove the Murdoch family from influence and control.
In late 2017, Comcast, outbid by Disney, lost out on a deal to purchase a majority of 21st Century Fox assets including a controlling interest in Sky.
In February 2018, Comcast returned to the market and offered $31 billion for the remaining assets of Sky. This purchase tangentially affects the Disney-FOX deal.
In February 2018, Sky secured the exclusive rights to broadcast the English Premier soccer league for three seasons at a lower-than-expected price, making Sky an even more valuable asset. This move did not go unnoticed by Comcast.
Finally, sensing the strategic opportunity brought forth by British regulators holding off Fox from purchasing the remaining 61% of Sky, and noting the lack of growth opportunity in the United States, Comcast bid $31 billion for Sky.
Why is a Legacy Pay-TV Asset So Valuable?
TDG has been accurately predicting the decline of legacy pay-TV for years. Why would anyone want to a pay a premium for an asset almost certain to weaken in value?
Comcast finds itself in a position of lacking where most of their distribution occurs. Acquiring Sky would increase their footprint to include five key European countries. Also, Comcast would acquire Sky’s streaming OTT service, Sky Now, which offers Comcast some compelling video distribution services options, something that Comcast lacks in its current portfolio of businesses.
As for Fox, it can now be argued to UK regulators that the Sky asset will become a Disney asset and thus beyond the reach of Murdoch, increasing the chance of regulatory approval. Without 100% control of Sky, the Disney deal would likely collapse, and the Murdoch media empire would be in serious trouble.
From Disney’s perspective, if it were to lose Sky, its entire global media strategy would be dealt a serious blow. The deal to acquire 20th Century Fox would be far less interesting and the valuation of Fox significantly lower if this were the case.
So Who Wins?
With Comcast and Fox desiring the same asset (Disney cannot bid directly for Sky due to its agreement with Fox), the ground is set for a potential bidding war between two behemoths. While many believe this is inevitable, I feel that the odds are more in favor of a compromise.
Bidding wars are generally good for no one but the seller. Victories are most often pyrrhic, and in this case, leaving a financially wounded Disney and/or Comcast to battle against their deep-pocketed competitors (i.e. Netflix, Google, Facebook) is not a good position for either player to be in. While it is far too early to predict what will ultimately happen, here are the most-likely scenarios.
For All Scenarios
- Fox (with the backing of Disney) will raise its bid for Sky.
- Comcast will likely counter with a higher offer, but only once.
Scenario 1 – Compromise
- Fox and Comcast will come to the realization that a compromise is a far better alternative than trying to destroy each other.
- Much like the Hulu relationship, Comcast and Disney share ownership of Sky.
- Disney acquires 20th Century Fox with no resistance from Comcast in exchange for Comcast relinquishing its share of Hulu.
Scenario 2 – Bidding War that Disney Wins
- Fox pays a significant premium for the 61% of Sky (with the permission of Disney).
- The valuation of 20th Century Fox is diminished, and Disney purchases a wounded Fox.
Scenario 3 – Bidding War that Comcast Wins
- Comcast pays a significant premium for the 61% of Sky.
- Comcast works out a deal with Fox to purchase Sky.
- Disney purchases the non-Sky assets of 20th Century Fox and looks at alternative international distribution properties.
- Comcast is left with a dated distribution technology in exchange for an international footprint.
At the end of the day, I hope that Comcast, Disney, and Fox will give peace a chance. An all-out bidding war serves no one.
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.