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15th of October 2018

Economy



Comcast carries off Sky

EXECUTIVES at Comcast in Philadelphia have grown accustomed to describing their company in a way that exudes angst: it is “cash-rich but future-poor”. The cable-and-entertainment giant generates $85bn in annual revenues but, unlike its principal rivals, Disney and AT&T, is regarded as poorly equipped to challenge a powerful competitor, Netflix, in global internet video. On September 22nd the company spent extravagantly to change that, outbidding 21st Century Fox (which was backed by Disney) for control of Sky, a European satellite broadcaster. It won the day, in a rare auction of a public company, with an offer of £30.6bn ($40.3bn).

It may prove a costly victory. Comcast shares have fallen by nearly 7% since the auction, on fears that it overpaid for a company whose core technology, satellite television, is becoming obsolete. Disney, as the “loser” along with Fox in the bidding, makes out like a bandit. The Mouse was to get a 39% stake in Sky as part of its acquisition of Fox. Now Disney will, by way of Fox, flip that stake to Comcast for lots of cash and pay down debt, freeing up more money to invest in its own ambitious Netflix-like service. (Disney probably also wants Comcast to divest its 30% stake in Hulu, which would give the new Disney-Fox combination 90% of the American internet-video company.) Disney’s shares have risen by 4%.

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The Panel on Takeovers and Mergers in Britain had set up the unusual auction to resolve a months-long bidding war between Comcast and Fox, which in turn was part of a larger tug-of-war between Comcast and Disney. In December 2016 Fox had agreed to a deal to buy the remaining 61% of Sky it did not own for £10.75 a share, or £11.7bn in total. But in December 2017 Fox agreed to sell much of its business, including its stake in Sky, to Disney (while spurning an offer from Comcast). Brian Roberts, boss of Comcast, then started bidding wars for both Sky and Fox.

Mr Roberts ultimately dropped his pursuit of Fox after Disney increased its original offer by $19bn (to $71bn, plus the assumption of Fox’s debt) but remained bent on getting Sky. What he has got for his money is a company with £13.6bn in revenues; 23m subscribers in Britain, Ireland, Italy, Germany and Austria; near-term rights to Hollywood studio films (including Disney and Fox films); top-flight sports rights including Premier League football in Britain; and some original programming.

Crucially, Comcast also gets a direct-to-consumer Netflix-like service called Now TV. As with AT&T and DirecTV in America, satellite-pay television is an outdated, high-margin business that is swiftly losing customers to cheaper video options like Netflix and Amazon Prime. Comcast may try to build Now TV into a powerhouse, taking money from the satellite business as it slowly declines.

For Rupert Murdoch, who launched Sky Television (a precursor to Sky) in 1989, it is a bittersweet ending to another chapter. He has sold much of his entertainment empire, leaving Lachlan, one of his sons, to run what remains of Fox after the Disney deal closes in the coming months. He also failed to take full control of Sky for a second time this decade (in 2011 he abandoned another bid because of a phone-hacking scandal at his newspapers).

But Mr Murdoch forced Mr Roberts to pay a hefty premium. Comcast’s sealed bid came in at £17.28 a share, compared with Fox’s bid of £15.67, a difference of nearly £4bn. Comcast is paying a premium of 125% over what Sky was trading at before Fox initially put Sky in play in December 2016. Craig Moffett of MoffettNathanson, a research firm, concludes that Comcast “grossly overpaid” for Sky. He notes the “winner’s curse” in auctions, that the successful bidder is the one willing to pay more than anyone else thinks it is worth. But Comcast is still cash-rich and may be considerably less future-poor.

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