Comcast Slides After Topping Disney In Bid To Buy Sky

Shares of Comcast (CMCSA) are sliding following the announcement that the company outbid 21st Century Fox (FOXA) in the auction for Sky (SKYAY) held this weekend. Meanwhile, Disney’s (DIS) shares are on the rise as Bernstein analyst Todd Juenger argued that this weekend’s outcome was “the best possible result” for the company. In a separate transaction, Fox is selling Disney its 39% stake in Sky as part of a $71.3B deal announced earlier this year.

COMCAST WINS WAR FOR SKY: Over the weekend, Comcast published an announcement containing the terms of a second increased superior cash offer for the entire issued and to be issued share capital of Sky at GBP17.28 per share, implying a value of $40B for the fully diluted share capital of Sky. The announcement follows the conclusion of an auction process in relation to Sky in which Comcast prevailed with the highest offer price. The other bidder was 21st Century Fox. The offer, which opened on July 13, remains open for acceptances by Sky shareholders until 1:00 p.m. on October 11, 2018.

MOVING TO THE SIDELINES ON COMCAST: In a research note this morning, Oppenheimer analyst Timothy Horan downgraded Comcast to Perform from Outperform and removed his $42 price target after the company won the auction to acquire Sky for 14 times EBITDA, or double its own multiple. The analyst cited the relatively high new pro forma valuation and expected increased competitive pressures from new technologies, namely fixed/mobile wireless and over-the-top video/compression. Horan noted he sees Comcast using Sky’s OTT platforms itself and good cross-selling. However, Comcast will need to invest in U.S. wireless/OTT capabilities and ultimately consolidate the U.S. cable industry to protect its franchise here, he contended.

‘BEST POSSIBLE RESULT’ FOR DISNEY: Commenting on the news, Bernstein’s Juenger told investors that this weekend’s outcome of the bidding war for Sky was “the best possible result” for Disney. The analyst argued that he never understood why Disney would want to operate a European DBS business, and never understood how Sky would contribute to Disney’s direct-to-consumer strategy. Rather than pay such a premium like Comcast, Disney can now get “paid” that premium, assuming Fox agrees to sell its stake and deliver the proceeds to Disney in lieu of the shares they had promised, the analyst contended. This morning, his peer at Loop Capital also commented on what Comcast-Sky deal could mean for both Fox and Disney. While Disney should also rise on the news, analyst Alan Gould believes “asymmetrical returns” favor Fox as the former’s stock price “approaches the high end of the collared range for the Fox transaction”. The analyst is positive on Fox “as an attractive way to buy Disney and create shares in the spinoff New Fox”, and added that while missing on Sky “complicates” Disney’s direct-to-consumer Europe strategy, investors will likely reward its stronger balance sheet and its independent efforts of launching a global streaming business. Gould reiterated a Buy rating and $51 price target on 21st Century Fox shares.