With a bidding war on the horizon, Comcast Corp.'s pursuit of the myriad assets that 21st Century Fox Inc. agreed to sell to Walt Disney Co. invites regulatory risk but could secure expanded international, sports and digital opportunities for Comcast, analysts said.
Comcast, having already been spurned by Fox's board of directors last fall, is in advanced stages of preparing an all-cash offer for the Fox assets that could approach $60 billion, representing a premium to the $52.4 billion all-stock offer Disney made in December 2017 — despite indications from Fox executives that they remain committed to the Disney deal.
Operationally, one major difference between Fox suitors Comcast and Disney is that Comcast already owns seven regional sports networks, or RSNs, through its NBCUniversal Media LLC subsidiary. Disney's ESPN (US) doesn't play in the local TV arena but has sought to change that through the acquisition of Fox's 22 RSNs.
Lee Berke, president and CEO of consultancy LHB Sports Entertainment and Media, said in an interview that a Comcast-Fox combination would give NBCU control of two-thirds of the RSNs in the U.S., which "could be an issue for regulators." Berke believes Comcast is "anticipating scrutiny on this front," and may be planning to divest "some of those networks."
Michael Nathanson, analyst at MoffettNathanson, in a recently issued note wrote that while the RSNs could become a hurdle to deal approval for Comcast, they would be prime assets for New Fox, which would emerge after the asset sale as a U.S.-centric purveyor of news and sports via key properties such as FOX (US), FOX News Channel (US) and national cable sports service FOX Sports 1 (US). However, tax issues complicate the picture here for Fox. As 21st Century Fox founder and Executive Chairman Rupert Murdoch told analysts in December 2017, "I would just say that if we kept [the] RSNs, it would have added a huge tax burden to the spin."
Nathanson said that if Comcast elected not to take on the additional regulatory risk borne by the RSNs, the deal would have to be structured to further limit Fox's tax liability.
On the cable front, the addition of FX Networks and National Geographic Channel would fortify the NBCU entertainment portfolio that already includes USA (US), Syfy (US), Bravo (US), Oxygen (US) and E! (US). The potential combination has raised the ire of the American Cable Association, with President and CEO Matthew Polka saying the ACA plans to oppose a deal that it believes will lead to higher prices and fewer choices for consumers.
Comcast's interest in Fox extends well beyond U.S. shores. When the media conglomerate announced its bid for Sky PLC in February as a platform for growth in Europe, Chairman and CEO Brian Roberts said Comcast's international revenues would increase from 9% to 25% of company revenues as a result. That ratio would jump higher under the broader transaction, which puts Fox Networks Group International with more than 350 channels in 170 countries in play, as well as Fox's fast-growing Star India.
"Comcast would certainly diversify its portfolio if it added the Fox assets," said Naveen Sarma, an analyst at S&P Global Ratings, in an interview.
Also at stake is whether Comcast or Disney will emerge as the majority owner in streaming service Hulu LLC. Fox's 30% stake is included in the assets up for sale. Comcast has been operating as a silent partner in Hulu under a consent decree reached with regulators as a condition of its 2011 acquisition of NBCUniversal, which also holds a stake in Hulu. That consent decree will end in September.
Disney's interest in the Fox assets is related in part to bolstering content contributions for both Disney's recently launched ESPN + streaming service and the Disney-branded direct-to-consumer service that is slated to bow in 2019. Should Comcast scoop up the Fox assets instead, it raises the question of whether Comcast might pursue a similar domestic direct-to-consumer play. Given Comcast's economic ties to the bundle as the nation's second-largest distributor, however, Sarma said that he expects such a move would emerge "more slowly" from a Comcast-Fox deal.
Comcast's interest in Fox also raises questions about leverage.
"Assuming a 15% premium on Disney's offer and all-cash, we believe leverage would go slightly above 4 times, tarnishing Comcast's pristine balance sheet," wrote Amy Yong, an analyst at Macquarie Research, in a research note, adding, "but we believe it could quickly get on a path to delever given clear synergies."
She estimates a Comcast-Fox tie-up could yield revenue synergies running between $500 million and $1 billion, based on cross-selling opportunities.
S&P Global Ratings' Sarma said Comcast has always been "a strong steward" of keeping a good ratio, but that could "blow up" with false steps.
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
