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Will Comcast's Pricey Play for Sky Pay Off?

Jeff Baumgartner
9/24/2018

Suffice it to say that Craig Moffett still isn't a fan of Comcast's play (overpay?) for Sky.

"For Comcast, we fear that Sky will be an albatross," MoffettNathanson LLC analyst Craig Moffett wrote Monday in reaction to Comcast's lofty winning bid for Sky over the weekend. (See Comcast Boosts Cash Offer for Sky and Comcast Outbids Fox for Sky With Offer of £17.28 Per Share.)

After arguing that Comcast Corp. (Nasdaq: CMCSA, CMCSK) "grossly overpaid" for UK-based video giant Sky , Moffett also downgraded Comcast's stock to "Neutral" and set a new target price of $36.

To put things in perspective, Moffett points out that in December 2016, before Fox first put Sky into play, the markets had valued Sky at just £7.67 ($10.07) per share, compared to Comcast's winning bid of £17.28 ($22.59), a 125% premium to Sky's "unaffected price of twenty one months ago."


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Investors aren't wild about Comcast's bid, either. Comcast shares were down 7.48% (to $35.06 each) in morning trading Monday. Meanwhile, shares in Sky are up about 8.5% at last check.

Noting that satellite video distribution, a major component of Sky's pay-TV platform, is "increasingly becoming obsolete," Moffett also questions whether Comcast will be successful in turning Sky's collection of exclusive programming deals into a global OTT powerhouse that can rival Netflix Inc. (Nasdaq: NFLX).

While Sky does have exclusive European content rights with big media names and sports properties such as HBO, Showtime Networks Inc. , Walt Disney Co. (NYSE: DIS), 21st Century Fox , Paramount, the Premier League, the National Football League, Formula 1, Serie A and Bundesliga, among others, those deals won't last forever. Additionally, HBO, Showtime and Disney already have plans to go direct-to-consumer, and Comcast will likely have to bid against well-heeled companies such as Facebook to retain rights to the Premier League, Moffett writes.

If the exclusives on some of that content are indeed fleeting, it also means that Comcast might have to take a page from the Netflix playbook by ramping production at its own studio -- another costly ramification.

Looking ahead, Moffett believes it is "reasonably likely" that a follow-on deal will see Comcast acquire the rest of Sky from Disney/Fox for the same "stupendous price" that Comcast has already agreed to pay. That might include a swap whereby Disney acquires Comcast's 30% stake in Hulu LLC , which has about 20 million SVoD subs, with about 1 million subs also taking its relatively new live TV service. Disney shares are up almost 2% this morning. (See As Hulu Live Tops 1M Subs, Who Leads the OTT-TV Race?)

"[S]uffice it to say that we believe whatever growth Comcast can generate in its new businesses will have to offset what we expect to be inevitable declines in its core," Moffett said.

Moffett also acknowledges that Sky won't be the "new center of gravity" at Comcast, as Sky would represent 11% of trailing 12-month revenues based on 61% ownership, and 17% if Comcast were to buy all of Sky.

However, the notion of future spending on self-produced content and uncertainties about Sky's transition to OTT makes it "big enough to matter," the analyst said.

Comcast, of course, has a much different view. Company chairman and CEO Brian Roberts has called Sky a "unique asset," while the company has touted Europe as a highly attractive market, and believes that the acquisition of Sky will "create a leading platform for growth."

As for analyst concerns that satellite TV is a struggling business, Roberts argued in February that Comcast views Sky as a broader "media company" with respect to its healthy blend of content creation and distribution.

— Jeff Baumgartner, Senior Editor, Light Reading

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bosco_pcs
bosco_pcs
9/24/2018 | 5:46:49 PM
Probably not but it won't kill Comcast either
Comcast had no choice. 

IMO, Comcast wanted to rain on Disney's parade by forcing the latter to pay more for Fox. Subsequently, it realized it might be in a weak position since there are fewer content assets out there, especially in Europe. Realizing it is boxed in, it goes all in with Sky.

Iger has already positioned Disney suggesting it doesn't need Hulu to thrive in OTT. It has BAM tech and ESPN skinny already after all. My guess is that it and Comcast are going to swap partial ownership of Sky (after Disney-Fox merger) and Hulu.

So, perhaps Disney has the last laugh.

But don't cry for the Robertses. First, the family has de facto control of Comcast. Second, even if it overpays Sky and the latter is a declining asset, it gives Comcast a foothold in Europe. Busting out of America is a long term play. More importantly, Comcast has enough cashflow to give it some cushion. It may stop buying back shares for a while but it shouldn't have problem keeping outside shaerholders happy with dividend.

Heck, if the stock keeps falling, it could be attractive value-wise. 
Gabriel Brown
Gabriel Brown
9/24/2018 | 3:41:55 PM
SKY pay-off
It might also be a play on the weak pound versus strong dollar. Potentially when UK politics normalizes again (ha!) and the pound recovers a more natural level (ha!) this deal could look 20 percent less expensive. This obviously isn't something you can bank on, but it does offer a possible upside. 

Having said that, the main point -- that SKY is a rare asset -- is the stronger reason for the acquisition.
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