Comcast (CMCSA 3.82%) emerged as the winning bidder for European Pay TV operator Sky PLC (NASDAQOTH: SKYAY) last weekend. Its final bid of 17.28 pounds per share was roughly 10% higher than the last bid from Twenty-First Century Fox (FOXA +0.00%).
Fox owned about 39% of Sky prior to making a bid of 10.75 pounds per share in December of 2016. That was already a 36% premium over Sky's share price at the time. Comcast's winning bid was 61% higher than Fox's original bid, and more than double what shares were trading for before takeover bids began about 23 months ago.
Many investors believe Comcast overpaid for Sky. Not only that, it's going to pay Fox about $15 billion for its 39% stake in the European company. Disney (DIS 1.59%), which is in the process of acquiring Fox, agreed to the sale as well. That money is going to go directly toward undermining Comcast and going direct-to-consumer. What's more, Comcast has put itself in a position where it might offer yet another helping hand to Disney's over-the-top ambitions.
Image source: Sky.
A big check to write
Comcast's bid values Sky at nearly $40 billion. At last check, Comcast doesn't have that kind of cash sitting on its balance sheet. That means Comcast is going to add a significant amount to its $64 billion in debt in order to pay for the acquisition. That means the ultimate cost of the acquisition could be a lot more than the sticker price when you factor in interest and the potential strain on cash flow from an increased debt load.
With Comcast taking over a controlling stake in Sky, Fox and Disney can't unlock much value from their stake in the European company anymore. It makes a lot of sense for Fox to sell its stake, and if it can get a massive premium for the shares, so much the better.
Interestingly, Comcast is considering a similar situation it finds itself in as a minority shareholder of Hulu. Comcast owns 30% of the streaming service, and Disney will own 60% when it closes its acquisition of Fox. Comcast is reportedly considering selling its 30% stake, since Disney will practically run the company now with its majority stake. Comcast could use those funds to help pay for its Sky acquisition.
The most likely buyer of Comcast's Hulu stake, though, is Disney. Giving Disney even greater control over Hulu would only accelerate its direct-to-consumer ambitions. BTIG analyst Rich Greenfield points out that selling its Hulu stake to Disney puts Comcast at risk of losing out on NBCUniversal licensing revenue, ceding greater control of the company's strategy to Disney.
$15 billion in Disney's pockets
As Disney prepares to acquire Fox, the sale of Fox's stake in Sky essentially gives it an extra $15 billion to use. Disney is also looking for a bidder for Fox's regional sports networks, which it's required by the Department of Justice to divest as part of its approval of the merger.
Disney plans to invest the additional cash in its direct-to-consumer platforms. In a press release announcing Fox's sale of its Sky shares, Disney said:
"Disney will expand its considerable investment in the Disney-branded direct-to-consumer offering launching in late 2019 and the new ESPN+ sports streaming service, and will seek to increase investment in Hulu's content offerings and international distribution.
If Comcast's purchase wasn't painful enough for investors, those last two words -- "international distribution" -- should hurt just a little bit more. It seems Disney is intent on following Comcast across the pond one way or another. Over time, Disney will be able to retain more of its content for global direct-to-consumer distribution, representing a growing threat to that shiny new Sky acquisition Comcast just made.
Comcast's decision to spend so much more than Fox on Sky TV is curious to begin with. Add in the fact that it's paying cash for Fox's shares and could sell its stake in Hulu to Disney in order to help fund its acquisition, and it's just putting itself in a bad position. Disney may soon have all of the weapons it needs to really put the hurt on Comcast.
