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Did Comcast Just Overpay for Sky?

By Danny Vena – Sep 26, 2018 at 2:02AM

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While the cable giant adds one to the win column, is it shareholders who will ultimately lose?

One of the last remaining clashes involving Twenty-First Century Fox (FOXA) (FOX) and Comcast (CMCSA -0.14%) was decided this weekend. Regulators in the United Kingdom presided over a rare auction to decide the fate of European cable operator Sky PLC (NASDAQOTH: SKYAY).

Comcast submitted a winning bid of 17.28 British pounds per share, or about $22.74 at current exchange rates, to acquire the available 61% of European cable operator Sky PLC (NASDAQOTH: SKYAY). This topped the 15.67 pounds per share, or roughly $20.62, offered by Fox and its soon-to-be corporate ownerDisney (DIS -1.83%). Fox already owns the other 39% and was hoping to gain control of the remainder.

The winning bid was valued at about $38.8 billion, leading some to speculate that Comcast paid far too much for the company.

Businessman doing financial calculations on calculator.

Image source: Getty Images.

The Sky's the limit

It's important to note that Comcast's bid was 38% higher that its original bid of 12.50 pounds, and 61% above Fox's 10.75 pounds-per-share offer in December 2016. This significant premium has some analysts questioning Comcast's decision to pay so much, causing Comcast's stock to fall as much as 8% in the wake of its auction win before ending the day down by about 6%.

It isn't clear exactly how much debt Comcast will ultimately hold, but with nearly $65 billion in debt on its balance sheet prior to the deal, that number could easily exceed $100 billion including its $39 billion offer for Sky.

Analyst Craig Moffett of MoffettNathanson downgraded Comcast's stock to neutral (equivalent to hold) after the results of the auction were revealed. In a note to clients, Moffet said, "It seems as though they would like investors to forget that [Sky] is also a satellite TV provider, and satellite video distribution is increasingly becoming obsolete." He went on to say that Comcast "grossly overpaid" for the European pay-TV provider, and "we fear that Sky will be an albatross." "We are very skeptical that this will turn out to be good for Comcast," he said.

Timothy Horan of Oppenheimer & Co. downgraded Comcast's stock from buy for the first time in nine years, saying the company paid "double its own multiple" for Sky at 14 times EBITDA, and faced "increased competitive pressures." While Comcast will realize cross-selling benefits from is ownership of Sky, it will still need to invest in upgrading to 5G and streaming to offset declines from its shrinking U.S. cable business.

BTIG's Rich Greenfield echoed the concerns of his fellow analysts, saying investors "will not be happy," and that "it is hard to see how Comcast will be able to dramatically increase earnings" from its investment in Sky. 

All part of its plan?

Some reports indicate that Comcast intended to bid 1 pound to 1.50 pounds higher than any Fox bid to ensure Sky. At least 50% of Sky shareholders will need to tender their shares in order to close the deal, and Comcast may have believed that if the competing bids were too close, shareholders -- particularly hedge funds -- might choose Fox and Disney's bid over Comcast, believing Disney offered investors greater potential returns going forward.

Comcast investors can take heart in the fact that Moody's maintained the credit rating on Comcast's debt, even if it funds the entire $39 billion with new borrowings. The company will still have to prove to investors that it hasn't paid more than the value it will eventually wring out of Sky -- and that's by no means a foregone conclusion.

Danny Vena owns shares of Walt Disney and has the following options: long January 2019 $85 calls on Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool recommends Comcast. The Motley Fool has a disclosure policy.

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