Comcast Outbid Fox for Sky, but Who Really Won?

There's a consolidation wave underway in the entertainment industry. Given that there are only a few media empires, they do seem to keep returning to the merger and acquisitions (M&A) battlefield in different configurations.

Earlier in 2018, Comcast (CMCSA -0.33%) and Disney's (DIS -0.83%) half-year-long bidding war for Fox's television and film assets ended up with winning suitor Disney spending an impressive $71 billion -- almost $19 billion more than its first offer. But this weekend, it was Comcast vying with Fox in an unusual one-day auction format for European pay-TV titan Sky, and Comcast won with a $39 billion bid -- about 60% more than Fox had opened with.

In this segment from the Market Foolery podcast, host Mac Greer and senior analyst Matt Argersinger discuss the deal, how Disney and Fox may have won by losing, and what these companies will do next.

A full transcript follows the video.

This video was recorded on Sept. 24, 2018.

Mac Greer: Matt, let's talk about another big deal. On Saturday, Comcast offering $39 billion for Sky, topping the bid from rival 21st Century Fox. This isn't a done deal yet. It's going to get a little messy. You consider that Disney owns 39% of Sky.

Matt Argersinger: Through Fox.

Greer: Through Fox. So now, Comcast has to deal with Disney. When you look at what it might mean for investors, shares of Comcast down today around 7%. Shares of Disney up 2%.

Argersinger: I think that tells the whole story. [laughs] You have to go back to December 2016 when Fox originally bid to acquire the 61% of Sky it didn't already own. This was before Disney and Comcast got into a war over Fox. This was before Comcast even jumped into the bid for Sky. Here we are today. Comcast has outbid Fox, which is soon to be owned by Disney, and they're paying a huge premium. If you look back to the original deal with Fox, it was somewhere around 11 pounds that Fox was originally going to pay for Sky back in December 2016, I think Comcast is paying around 17 pounds, a 61% premium for Sky shareholders. So, it's been a good run for them.

What that does, and the reason I think Comcast is down and Disney is up, is because, one, Comcast is paying a huge premium. But, from Disney's perspective, you own this 39% of sky through Fox that now is valued at around $15 billion. I believe that Disney is going to look to offload that to Comcast probably around that level. Now, Disney gets $15 billion through this Sky deal. That's helpful, pays down a lot of debt. But now, I think Comcast is in a position -- we talked about this for the show, which I think is key -- the 30% of Hulu that they own, Disney and Fox own 60%, Comcast owns 30%, AT&T has 10%. But now, maybe, as part of giving up that 39% of Sky that Disney owns, in addition to cash, they're probably going to want that 30% Hulu stake. Then they have 90% of Hulu. I don't think Comcast is going to hold on a 30% of Hulu if they know that Disney and Fox own a 60% majority stake. They're running the bus. Why would they hold on?

In a way, at the end the day, Disney is getting a lot more cash than they thought, potentially, for Sky. They're getting probably a 90% stake in Hulu. Disney is looking pretty good. Comcast, on the other hand, has now paid a huge premium for what is effectively another cable company. I know it's a satellite business, top box operator. But they're essentially paying for the same business, just in an international setting. It's got some great assets, got some good content. But Comcast just paid a lot for acquiring essentially an international asset that looks very much like what they have in the United States. Disney now has more cash, is focused on its core content, focused on its own distribution. It doesn't really ultimately need Sky. It doesn't need more international distribution. It's going to have its distribution through its apps, through the ESPN+ app, through the Disney app, and now through Hulu, where they have a vast majority stake.

Greer: I'm a Disney shareholder, so I should be pretty excited. It sounds like Comcast may have overpaid here, and, and, and, if Disney plays this right, they still may keep Hulu.

Argersinger: Yes. I think Disney comes out of this feeling pretty good. They're not paying a huge premium for Sky. They just finished paying a huge premium for Fox. The deal hasn't even gone through yet. They've let Comcast have those assets. Disney gets what they ultimately want, which is a lot of cash to pay down some debt, Hulu, and they're off to the races. And Comcast can deal with integrating Sky for the next several years.