Comcast changes course, says it will pursue U.K.-based Sky instead of other Fox assets
Comcast's decision seemed in harmony with those of many analysts who hoped that Fox, Comcast, and Disney would back off a bidding war over Murdoch's entertainment empire. But settling for slow-growing Sky is a comedown for Comcast, which is looking for ways to grow and compete with the online streamer Netflix.
Comcast Corp. walked away Thursday from a hugely expensive takeover battle for 21st Century Fox with the Walt Disney Co. — which could have made the Philadelphia company a global giant that was even more powerful in Hollywood — and instead will focus on buying the European Sky satellite-TV business.
But it's not clear that Comcast can pull off that $34 billion deal, either.
The lost Fox deal leaves Comcast as a mostly U.S.-bound cable, internet and entertainment company seeking sources of revenue and profit growth as it faces a larger Disney juggernaut and what analysts call the "melting ice cube" of subscribers who are dropping cable service, or people not signing up for it.
Some believed that the Fox entertainment assets were among the last big properties that could take Comcast into international markets, though it can partly accomplish that with Sky in Europe. Analysts also believe that Comcast would like to make Sky a global streaming brand, like Netflix.
Both Comcast and Disney felt motivated to chase the Fox assets so fiercely because of the vast threat posed by Netflix, which has expanded rapidly around the globe and has spent $30 billion on original content since early 2014, according to online publication Business Insider and Statista.
"This makes Disney a stronger adversary for Comcast," said Kevin Werbach, professor of legal studies and expert in telecommunications policy at the Wharton School of the University of Pennsylvania, referring to Comcast's decision to stand down.
He called the lost Fox deal a "modest setback," while noting that "it's misleading to look at these transactions as wins and losses. Comcast is still very well-positioned and is the nation's most powerful integrated media-communications player." He added that neither the Fox nor Sky deals were "desperate, bet-the-company shots."
Disney, which will add the Fox Hollywood studio to its stable of the Lucasfilm, Pixar, and Disney film studios, wants the Fox entertainment assets for a pipeline of content for direct-to-consumer streaming services. Disney will also gain majority control of the streaming service Hulu with a Fox deal that it could use to offer an alternative to Netflix. The Burbank, Calif.-based Disney will be a major force offering entertainment through cable TV (ESPN), broadcast TV (ABC), movie theaters, and the internet.
Wall Street analysts had urged Comcast to be cautious for weeks, fearing that an ego-driven bidding war between Comcast CEO Brian L. Roberts and Disney CEO Bob Iger would drive the price for Fox to stratospheric heights and benefit only Fox shareholders.
Disney first reached a deal for the Fox assets — which include a 39 percent stake in Sky — for $52 billion in late 2017. Comcast countered with $65 billion on June 13. Disney's last offer, on June 20 — the one that seems likely to prevail — was for $71 billion. Fox and Disney shareholders are expected to vote on the deal in separate meetings in New York next Friday.
"Walking away from the battle for Fox at this price we think supports the view that they are fine without it," New Street Research analyst Jonathan Chaplin said of Comcast on Thursday. "It remains to be seen how Sky wraps up, but we think it is highly unlikely that they would bid up to a price that would suggest desperation, and lose."
Moody's Investors Service warned that if Comcast had bought Fox and Sky, it would become the second-most-indebted company in the world, after AT&T/Time Warner.
With some of the uncertainty over, Comcast stock on Thursday rose 2.6 percent, or 87 cents, to $34.91. Disney shares climbed 1.3 percent while 21st Century Fox fell 0.3 percent.
This is the second major takeover setback for Comcast after its decision to abandon a deal for the Time Warner Cable proposed transaction in 2015 that federal regulators opposed. Comcast has missed the latest wave of telecom and entertainment deals while streamers such as Netflix pose an increasing threat to cable.
Politics and personal relations also played a part in the takeover battle for Fox.
Disney — a Comcast target for the Roberts takeover machine about 15 years ago — seemed willing to spend whatever it took to buy Fox. And the wily Fox founder, Rupert Murdoch, 87, seemed equally determined to sell his entertainment empire to Disney, snubbing Comcast.
Comcast also faced a potentially hostile regulatory review of a Comcast/Fox deal, since the Justice Department's antitrust division has said it will appeal a federal judge's decision approving the AT&T/Time Warner deal. That could make future so-called vertical mergers such as Comcast/Fox less likely to pass regulatory muster.
A big wild card in a hostile Comcast/Fox deal rejected by Murdoch was the Trump administration. President Trump is friendly with Murdoch and politically allied with his Fox News cable channel, which Murdoch will continue to own along with the Fox broadcast-television network and national Fox sports cable channels even after selling most of his entertainment assets to Disney. Disney will acquire Fox's Hollywood studios, content library, cable channels, international networks, and 39 percent stake in Sky.
Roberts was gracious, saying in a statement, "I'd like to congratulate Bob Iger and the team at Disney and commend the Murdoch family and Fox for creating such a desirable and respected company."
Sky, based in the United Kingdom, has about 23 million subscribers, along with content businesses such as Sky News, and a Sky-branded streaming service. Some also believe that Sky could be facing modest growth in its core satellite-television business as Europeans look more to streaming entertainment.
Sky reported a 5 percent gain in revenues and a 10 percent jump in profits for the nine months ending March 31, 2018, its most recent financial results.
The company also added 480,000 subscribers over the last year, with its operations in the United Kingdom, Ireland, Italy, Germany, Austria and Switzerland.
Comcast is seeking to buy Sky through an offer to shareholders. But Murdoch has said he would like to retain control of Sky and hand it off to Disney. He would still need to top Comcast's offer.
Analyst Craig Moffett of MoffettNathanson believes that Comcast would like to broaden the Sky-branded streaming service into a global brand.
"The risk," Moffett wrote on Thursday, "is that Comcast has become so enchanted with what Sky could become that they have lost sight of what Sky actually is. Like it or not, what Sky actually is is a satellite TV provider, with all the shortcomings that that implies (most notably, technological obsolescence)."
Moffett is concerned that to produce the TV shows and entertainment to make a Sky streaming service viable, Comcast would have to "spend like drunken sailors to do it."