Cable giant Comcast (NASDAQ:CMCSA) just put a spanner in the works for Walt Disney's (NYSE:DIS) pending acquisition of Twenty-First Century Fox (NASDAQ: FOX) (NASDAQ: FOXA). In a surprise announcement posted early Tuesday morning, Comcast launched a competing bid for Fox's ongoing effort to pick up British broadcaster Sky Networks (NASDAQOTH: BSYBF), which would rip nearly half of the expected value out of Disney's Fox offer.
This is getting complicated.
Comcast's bid for 50% "plus one share" of Sky would value Sky at $31 billion at today's dollar-to-pound exchange rates. That's 16% above Fox's existing offer.
In a prepared statement, Comcast CEO Brian Roberts praised Sky's strong positions in markets like Italy, Germany, and the U.K., "Comcast intends to use Sky as a platform for growth in Europe," Roberts said. "Adding Sky to the Comcast family of businesses will increase our international revenues from 9% to 25% of Company revenues."
Sky's board of directors has not approved Comcast's offer, though Roberts holds out hopes that this approval will come "in due course."
What is Comcast competing with?
Both Comcast and Fox have structured their Sky deals as all-cash payments, so the stock prices of potential buyers will not be a factor.
Twenty-First Century Fox already owns 39.1% of Sky, lowering the bar Fox must clear in order to gain full control of that company. Comcast has no such existing investment. That explains why Fox is seeking to buy all of Sky's remaining equity, while Comcast would settle for just over 50%.
Fox expects to move forward with its Sky buyout while in the process of being bought out by Disney. The idea is to close the Fox-Sky merger first and then complete the Disney-Fox deal -- including Sky. It's unclear what Disney will do if Comcast (or regulators, or anybody else) manages to remove Sky from the Fox package.
British regulators have voiced their opposition to a combination of Sky and Fox. That antitrust challenge would probably fall away if the offer from a pure, stand-alone Twenty-First Century Fox is replaced by a different business such as Disney or Comcast. Disney's Fox deal would separate Sky from the problematic and unpopular politics of Fox founder Rupert Murdoch, and Comcast wouldn't even bring Murdoch into the discussion.
Therefore, completing the Disney-Fox deal first would most likely clear the way to regulatory approval -- assuming that Disney can secure approvals for the Fox acquisition in the first place -- and so would a competing Comcast-Sky merger. Fox has promised to keep Sky News running for at least 10 years, even if it's competing with the company's own Fox News in a world where the Disney merger never closes. The regulatory body has yet to respond to this commitment.
What's the big deal, anyway?
From top-level sports and news coverage to premium entertainment productions, Sky has it all. This company would add value right away to Fox, Disney, or Comcast, and it's easy to see why all of these potential buyers are getting all worked up.
Sky serves 23 million customers across seven European countries. The company's revenue topped $17 billion in 2017; Sky also comes with positive cash flows and earnings, and sports a premium brand in the eyes of many European consumers.
Sky shares rose more than 19% on Comcast's offer. Comcast, Disney, and Fox stocks all took single-digit haircuts instead. Sky is currently trading slightly above the Comcast offer, indicating that investors may expect a bidding war to break out.
I wouldn't be surprised to see Fox picking up Comcast's thrown glove with an improved Sky bid of its own. Then again, Sky's directors and shareholders could simply decide that the Sky-Fox-Disney chain of deals for full ownership of the British broadcaster is preferable to Comcast going just above the halfway mark.
Grab a bucket of popcorn and a comfortable seat. This drama just got interesting.