With the U.S. satellite TV business in free fall, Comcast CEO Brian Roberts worked hard this week to spin the notion that the European satellite company he’s trying to buy faces entirely different market dynamics.
His message seemed well-received in a U.K. region that fears what the incumbent bidder for Sky, Fox News impresario Rupert Murdoch, will do with Sky News. But back home, where backing for what will almost certainly become a bidding war with Murdoch counts, Roberts' Sky gambit was referred to by at least one analyst as a “quixotic” plan.
Calling the comparison of Sky to Dish Network and DirecTV “apples and oranges,” Roberts enjoyed traction with European media and telecom investment analysts.
“Cord cutting in North America has been disastrous for growth prospects in the region—pay TV connections per household will fall from 77% in 2017 to 70% in 2022. The Western European market remains buoyant, and cord cutting has had a much lower impact,” noted Martin Scott, principal analyst at Euro-headquartered consultancy Analysys Mason.
“With traditional distribution channels under crippling pressure to compete with their digital competitors and daily television viewing falling rapidly, consolidation within the industry has increased rapidly as legacy entertainment companies engage in new media combinations to combat digital competition,” agreed Linda Sullivan, partner and head of media and digital at London-based Cavendish Corporate Finance.
"There is a strong rationale for Comcast to acquire Sky as it would give it immediate leadership positions in the U.K., German and Italian pay TV markets and a presence in Spain,” added Ian Whittaker, analyst for also-London-based Liberum. “At the moment, Comcast does have presence in these markets mainly through its NBC Universal film and TV assets, but this would give it a very powerful distribution pan-European network. The recent announcement on the new Premier League rights contract has also taken out the risks from significant price inflation here.”
U.K. analysts also liked Comcast’s chances of gaining regulatory approval of a Sky purchase, given the local government’s feelings about Murdoch.
“We believe that Comcast ownership of Sky represents a much less controversial outcome for the CMA and U.K. government,” said Jefferies analyst Jerry Dellis. “Comcast's approach could even encourage the CMA to adopt a harder line in its response to the Sky News remedies submitted recently by Fox. Comcast offers no media plurality concerns, in our view, and stresses its commitment to Sky's London HQ, to content production in the U.K. and to Sky News.”
Outside Europe, the mood was a little more sour.
“For Comcast shareholders, there is a mix of good and bad in this morning’s announcement of a topping bid for Sky,” MoffettNathanson analyst Craig Moffett posted on Tuesday. Unfortunately, the bad outweighs the good.
The good news, according to Moffett? Comcast will “get additional distribution for NBCU content in Europe, and some European content to distribute in the U.S. And, because the deal is all cash, Comcast would (happily) increase their leverage (to 3.0x EBITDA pro forma), which is something for which their shareholders have been pleading for years.”
The bad news? All of this, the analyst said, could have been “achieved just as easily through arms-length negotiations.”
Oh, and Moffett isn’t a fan of the satellite TV business, regardless of where it’s situated.
“Notably, the word ‘satellite’ never even appears in the investor presentation that accompanies this morning’s conference call, almost as if they are hoping no one notices,” Moffett noted. “Yes, Sky is more than just a direct-to-home satellite TV distributor, but … well, let’s face it, Sky is a direct-to-home satellite TV distributor. And yes, Sky is also a broadband provider, … but it is a resale broadband platform, not a facilities-based one, and therefore it is one that, unlike in the U.S., lacks any competitive advantage whatsoever.”
Moffett, who downgraded Comcast to “neutral” for several months last year, has yet to pull the trigger on the No. 1 cable company. But you get the feeling that's coming after the analyst said the operator is currently “deep in the penalty box” after its “quixotic” Sky bid.
For her part, Amy Yong, analyst for Sydney-based Macquarie, did downgrade Comcast to neutral, arguing that the conglomerate has better ways to use its cash on hand to serve shareholders.
“Comcast could buy back its own stock at 8x vs acquiring Sky at 12x; although the deal is expected to be accretive in Y1, we question the synergies given the cross border combination,” she told investors. The dissent is notable, given that Comcast will likely face a challenge from Fox and will need investor support in the U.S. to fight that expensive battle.
“It's hard to see Murdoch just handing it over to Comcast after spending years building this up and setting up the Disney megamerger,” said ETX Capital's Neil Wilson. “This implies a higher counteroffer, which appears to be what the market is betting on now, with the stock trading at above £13, up 19% on the day. A bidding war looms—there is even talk of a third bidder potentially swooping in now that Sky is now very much open to all comers.”