April 26, 2018

Breakingviews: Strife of Brian – Sky-High Prices

by Breakingviews

Deals rarely look as good on paper as they do in a chief executive’s head. Comcast’s $31 billion offer for UK satellite broadcaster Sky just about passes financial muster. Investors expecting a higher bid from Rupert Murdoch’s Twenty-First Century Fox , with backing from Walt Disney boss Bob Iger, are betting on the triumph of sentiment over spreadsheet.

The cable giant run by Brian Roberts on Wednesday firmed up its offer of 12.50 pounds per Sky share, beating Murdoch’s December 2016 bid by 16 percent. The move endangers the mogul’s plan to sell Fox – including Sky – to Disney for $52.4 billion in stock. It also dashes any hopes that Iger and Murdoch could persuade Roberts to back away by offering him an alternative asset, like U.S. streaming service Hulu. Assuming British regulators clear both bids, it’s a straightforward battle on price.

Comcast has the stronger hand. On Wednesday the $155 billion company said it had identified $300 million of annual pre-tax cost savings and a further $200 million of gains from combining Sky’s TV shows and movies with Comcast’s NBCUniversal library. Generously add those to consensus estimates for Sky’s operating profit in 2020, tax the lot at 18 percent, and the return on invested capital is almost 7 percent. That’s just about in line with cable groups’ cost of capital, according to New York University estimates.

It’s hard to see how Murdoch and Iger could justify going higher. The House of Mouse has less overlap with Sky’s core business as a distributor of video entertainment. Second, Comcast has greater firepower: its leverage is low for a cable group and its EBITDA this year will be greater than Disney and Fox combined, according to Eikon estimates. Besides, Comcast’s dual-class stock means Roberts does not have to fret about shareholders blocking his plans.

Iger might conclude that Sky is crucial to his European expansion. Murdoch, meanwhile, will be reluctant to part with the company he spent decades building, and might want to hang on to Fox’s 39 percent stake in case the wider Disney tie-up collapses. Nevertheless, investors who pushed Sky shares up 4 percent to 13.57 pounds on Wednesday are wagering on Disney and Fox disregarding financial sense.

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