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Analysis: Comcast's historical M&A record hints at potential Sky strategy

Although some believe Comcast Corp. and 21st Century Fox Inc. are on the brink of a bidding war for British pay TV giant Sky plc, there could still be a chance for the two sides to find a peaceful resolution.

Comcast, the largest cable operator in the U.S., late in February announced a possible offer to acquire Sky. The bid, if finalized, would challenge an existing offer from Sky's long-time partner and minority stakeholder 21st Century Fox. While this sets the stage for a possible bidding war between two major U.S. media conglomerates, analysts said Comcast's historically disciplined approach to M&A, as demonstrated by the structure of its two-part purchase of NBCUniversal Media LLC, hints at a potential alternative deal strategy.

"I think [Comcast CEO Brian] Roberts opened the door to not having a bidding war," said Kagan analyst Derek Baine, referencing a Feb. 27 conference call during which Roberts said Comcast "would like to buy all of Sky, but we have set an acceptance condition of 50% plus 1 share." Based on this, Baine said Fox could maintain its existing 39% stake in Sky, while Comcast acquired the majority position. Kagan is a media research group within S&P Global Market Intelligence.

Moody's Senior Vice President Neil Begley agreed, noting that this would be similar to Comcast's strategy when it acquired NBCUniversal. In 2011, Comcast purchased 51% of NBCUniversal in a deal valued at $13.75 billion. Two years later, Comcast bought the remaining 49% stake in a deal valued at $16.70 billion. Combining the two and adding in assumed debt, the Comcast/NBCUniversal transaction had a total value of $37.70 billion.

Begley said of Comcast's intentions toward Sky, "I think they are inclined to do the transaction as long as they can get control of it and then worry about getting the rest of it later."

But he stressed that sharing ownership of Sky would only be a short-term means to the long-term end goal of 100% ownership, as anything less comes with myriad strategic disadvantages.

"Most media joint ventures and partnerships have not done well," Begley said, pointing to Hulu as an example of a jointly owned asset that never lived up to its potential. Walt Disney Co., Fox and Comcast's NBCUniversal each hold a 30% stake in Hulu, while Time Warner Inc. holds a 10% stake.

"They've been very slow — Netflix [Inc.] passed right by them … and the parent companies wouldn't provide all their programming," Begley said of Hulu. Disney has since announced its intent to launch its own stand-alone subscription video-on-demand services.

If Comcast does decide to move forward with its possible offer for Sky, analysts believe the company will remain disciplined in its proposed terms.

"Comcast has a fairly conservative approach to leverage and has a strong track record with acquisitions, putting it in a good position," Kagan analyst Ian Olgeirson said in an interview.

According to S&P Global Market Intelligence data, Comcast ended 2017 with total debt of $64.56 billion and a debt/EBITDA ratio of 2.32x. By comparison, 21st Century Fox ended 2017 with $19.91 billion in total debt but nevertheless still had a higher debt/EBITDA ratio of 2.80x. Debt/EBITDA ratios are commonly used by credit rating agencies to assess a company's probability of defaulting on issued debt. The lower the ratio, the more likely a company will be able to service its debt in an appropriate manner.

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Comcast's possible offer for Sky proposes to pay £12.50 per share. By comparison, Fox had previously offered to pay £10.75 per share for the 61% of Sky that Fox does not already own.

At £12.50 or $17.37 per share, Comcast's possible offer would value Sky at roughly £22 billion or $30 billion. Moody's noted that while this would temporarily elevate Comcast's gross debt/EBITDA leverage, the rating agency believes Comcast has the financial capacity to bring leverage back down within two years of the closing the deal, assuming the proposed possible offer remains unchanged. The firm noted that after tax reform, Comcast even without the deal stands to generate between $8 billion and $9 billion of annual free cash flow, which would enable the company to pay down debt in short order.

Speaking at a March 5 investor conference, Comcast CFO Michael Cavanagh said the company remains "committed to having a strong balance sheet," adding that if Comcast does buy Sky or pursues any other deal that raises the company's leverage above its current level, "We would see, within a few years, bringing that leverage back down."

It remains unclear, though, whether Fox will counter Comcast's possible offer with a higher bid of its own. One major factor that may influence Fox's decision is its own pending deal with Walt Disney. The media titan is in the process of buying various Fox properties, including the company's current 39% stake in Sky, a relationship that may increase Fox's financial flexibility.

In a Feb. 28 blog post, BTIG LLC analyst Rich Greenfield said Fox could increase "its offer for Sky to at least match Comcast's offer, with Disney increasing the price it is paying in concert for Fox's assets to compensate." The analyst added that if Fox and Disney are to actually succeed in buying the remaining stake in Sky, "Fox likely needs to go well above the current Comcast/Sky bid level as Comcast clearly appears willing to go well beyond £12.50/share."

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