Comcast won its fight with 21st Century Fox for Sky over the weekend, but now the company is taking its lumps from industry analysts for apparently overvaluing the European operator.
Late Saturday, Comcast emerged from a U.K. regulatory-sanctioned auction for Sky with a victorious bid of £17.28 per share, setting an implied value of $40 billion (£30.6 billion) for the fully diluted share capital of Sky. That far eclipsed the $34 billion Comcast bid in July and, as MoffettNathanson analyst Craig Moffett noted, positively blew out of the water earlier valuations for Sky.
“Way back in December 2016, before Fox first put Sky into play, the wisdom of the markets had valued Sky at just £7.67 per share, or about 8x 2018E EBITDA,” Moffett wrote in a research note. “On Saturday, Comcast agreed to pay £17.28 ($22.59), a 125% premium to the stocks unaffected price of 21 months ago. Comcast’s ‘winning’ bid values Sky at a stupendous 15x F2019E EBITDA.”
And Comcast’s price is only for the 61% of Sky that isn’t currently owned by Fox. If Comcast ends up buying that stake from Fox, it will pay the same per-share price, but Moffett imagined any deal with Fox and Disney, which is buying much of 21st Century Fox in a $71.3 billion deal, could involve a swap in which Disney takes Comcast’s 30% ownership in Hulu.
Moffett said Sky could become an “albatross” for Comcast. While Sky and its programming agreements could help Comcast launch an OTT provider play, Moffett said Sky’s primary satellite provider business is worrisome.
“We won’t rehash here all that we’ve written about Sky, but suffice it to say that we believe whatever growth Comcast can generate in its new businesses will have to offset what we expect to be the inevitable declines in its core,” Moffett wrote.
Oppenheimer Equity Research concurred with MoffettNathanson regarding pressures facing Comcast and downgraded the company to Perform while removing its $42 price target, due to a relatively high new pro forma valuation and expected increased competitive pressures from new technologies like fixed/mobile wireless and OTT video/compression.
“We expect CMCSA to use SKY’s OTT platforms itself and see good cross-selling; however, CMCSA needs to invest in US wireless/OTT capabilities and ultimately consolidate the US cable industry to protect its franchise here,” Oppenheimer analyst Timothy Horan wrote in a research note.
Jefferies analyst John Janedis said that though the price Comcast paid for Sky was “modestly above our expectations,” his firm was still maintaining its Buy rating for Comcast.