By Felix Bacchetta (Wharton School) | 19/10/2018
Overview of the deal
Acquirer: Comcast Corporation
Target: Sky PLC
Estimated value: $39bn
Announcement date: 22/09/18
Acquirer Advisors: BAML, Evercore Partners, Robey Warshaw, Wells Fargo
Target Advisors: Barclays, Morgan Stanley, PJT Partners
Comcast emerged as victorious in a never ending auction battle to purchase pan-European cable company Sky in September of 2018. The final stages of the sale process were held in the form of a three-round blind auction between the two largest bidders, Comcast and 21 Century Fox. Ultimately, Comcast’s last sealed bid of £30.6 billion (£17.28 per share), surpassed Fox’s £27.6 billion (£15.67 per share) offer. The £17.28 per share price reflects a record 125% premium over Sky’s December 2016 closing price, prior to Fox’s initial bid.
The all-cash transaction will be financed entirely with new debt. As Fox already held a 39% minority stake in Sky, Comcast ensured its premium was high enough to convince shareholders inclined to remain with Fox to sell.
In July of 2018, Comcast lost a bidding war for Fox’s entertainment assets to Disney. Had Comcast lost the bidding war for Sky, Fox and therein Disney would have been able to obtain a 100% stake in Europe’s largest broadcaster. As it remained initially uncertain whether Fox would sell its 39% stake in Sky or not, the firm ultimately made the decision to sell its shares, making Comcast Sky’s majority shareholder, as of October 10, 2018. Ultimately, Comcast aims to acquire all of Sky’s shares.
"We are pleased today to be the majority owner of Sky. Led by Jeremy Darroch and his superb team — now together with Comcast — our combined global leadership in technology and content paves the way for us to accelerate investment and growth in Sky’s brand and premier platforms. We are also fully committed to ensuring Sky News' future, maintaining its editorial independence, and preserving its strong track record for trusted, high quality, impartial news." - Brian Roberts, Chief Executive Officer, Comcast.
Company details (Comcast Corporation)
Comcast Corporation is a global technology and media company. The companies distributes both cable and satellite television, and offers high-speed internet and cellular telecommunication networks to service providers. Additionally, Comcast produces and distributes filmed entertainment under Universal Pictures and DreamWorks Animation mainly. It also operates theme parks across the U.S. and Japan.
- Founded in 1963, headquartered in Philadelphia, PA
- Chairman, CEO & President: Brian L. Roberts
- Number of employees: 164,000
- Market Cap: $157bn - EV: $218bn
- LTM Revenue: $82.2bn - LTM EBITDA: $28.4bn
- LTM EV/Revenue: 2.5x - LTM EV/EBITDA: 7.7x
Company details (Sky PLC)
Sky PLC is British-domiciled entertainment and communications company. It offers television broadcasting and home communications services across the United-Kingdom, Ireland, Italy, Germany and Austria.
- Founded in 1988, headquartered in Isleworth, United-Kingdom
- CEO: Jeremy Darroch
- Number of employees: 31,000
- Market Cap: $30bn - EV: $36bn
- LTM Revenue: $13.6bn - LTM EBITDA: $2.0bn
- LTM EV/Revenue: 2.7x - LTM EV/EBITDA: 17.6x
Projections and assumptions
In 2011, Fox had already tried to purchase the remaining 61% stake in Sky it didn’t own. Yet, Fox’s attempt failed, as it was met with fierce opposition from the U.K. government. Later, in December of 2016, Fox attempted once more to buy the remaining portion, but faced again significant regulatory and political hurdles. Indeed, the U.K. government is concerned about Fox Chairman and CEO Rupert Murdoch’s growing influence in the industry. Murdoch already owns major British tabloids including The Times and The Sun. Hence, critics argue that Fox’s total control of Sky News would give the mogul too much influence in the U.K news business and potentially be a threat to media plurality. Consequently, in an effort to appease regulators’ concerns, Fox proposed to sell Sky News in the event it would be able to complete the acquisition.
Nevertheless, Fox’s efforts were still met with skepticism, which delayed the acquisition process and allowed Comcast to step in by making an unsolicited bid for £12.50 per share in February of 2017. A bidding war ensued, as both Fox and Comcast rose their offers, leading U.K. regulators to hold a sealed-bid auction for Sky, in an attempt to put an end to the never-ending bidding war. Following the outcome of the auction, Sky’s shares reacted positively, jumping 9% over their previous closing price. On the other end, Fox rose by close to 2%. However, investors were concerned with the excessive price Comcast bid, as reflected in the 7% decline in Comcast’s stock price.
This acquisition comes at a time when TV broadcasters are being threatened by new disruptive entrants in the industry. Content creators and Video streaming platforms such as Netflix, and Amazon Prime are set to capture significant market share from long-established cable companies in the near future. Hence, more traditional players see consolidation and expansion of their offerings to online digital platforms as ways to remain competitive. Along these lines, Disney purchased Fox recently, Discovery bought Scripps Networks, AT&T merged with Time Warner, and Viacom merged with CBS.
In the words of Comcast CEO Brian Roberts, Comcast will be allowed to “quickly, efficiently and meaningfully increase customer base and expand internationally.” Comcast will now have access to a network of 53 million Europe-based subscribers, which will allow Comcast to diversify its activities outside of the U.S., where online video streaming companies are severely damaging the cable industry. Moreover, Sky already operates online TV streaming platform Now TV, and plans on offering all their content online in the future. Comcast, who already owns a minority stake in online streaming platform Hulu, will now be poised to compete with Netflix and other online video content providers in the European market. The deal also guarantees Comcast the access to Sky’s broadcasting rights for the English Premier League, along with other major European soccer leagues. This is especially important for Comcast, as large tech companies such as Google and Alphabet are set to enter the sports streaming business. Additionally, Comcast, who owns a majority stake in NBC would be able to combine Sky News and NBC News’ resources, hence potentially realizing operational synergies.
A larger scale also means Comcast will have more bargaining power when it comes to purchasing streaming content or broadcasting rights. On the other end, Sky will have access to more funding for auction bids, notably for the particularly costly soccer league broadcasting rights.
Risks and uncertainties
There is concern however around Comcast acquiring a traditional broadcaster. As times are changing and traditional cable companies are increasingly threatened by online streaming platforms, the purchase of a company whose core activities rely in its satellite distribution capacities carries substantial risk. Unlike competitors Netflix, Amazon and Disney, both Sky and Comcast are cable operators. Although millennials and younger generations are shifting away from using traditional TV to the benefit of online broadcasting services, the NewCo could arguably still benefit through its enlarged offering of high-speed internet subscriptions, which yields higher margins than TV cable distribution.
However, Comcast’s determination in acquiring Sky, supplemented by its failed bid for Fox’s assets to rival Disney, may show that management isn’t confident in Comcast’s core business and is rather aiming to diversify their activities. Comcast’s initial bid for Sky along with the announcement of the transaction were both followed by decreases in Comcast’s stock price.
Moreover, there is concern around the substantial amount of new debt Comcast will have to carry on its balance sheet following the acquisition. The deal is set to be financed through three different credit facilities consisting of an unsecured bridge loan of £12.9bn, followed by two unsecured term loans for respective maximum amounts of £7bn and $6bn, and a final $7.6bn maximum revolver. Rating agencies are wary of the high leverage used in the transaction. S&P Global Rating already placed Comcast’s A- rating on its watchlist, following the firm’s previous bid for Sky in February of 2018.
"We wish Comcast had not acquired Sky… We wish they had walked away when it became clear Comcast would have to pay £30.6 billion ($40 billion) to beat a rival bid from Rupert Murdoch's 21st Century Fox for a controlling stake in Sky.” - New Street research
Sources: The Wall Street Journal, Bloomberg, S&P Net Advantage, CNBC, phys.org, Market Watch
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