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Abu Dhabi, UAETuesday 23 October 2018

As deadline looms on $71bn Fox deal, several outcomes on horizon

Comcast CEO wants 21st Century Fox’s entertainment assets and will spare nothing to beat Walt Disney’s enormous offer

A Walt Disney store on the Champs Elysee in Paris, France. There is nothing certain about how the battle for 21st Century Fox will pan out. Christophe Morin/Bloomberg
A Walt Disney store on the Champs Elysee in Paris, France. There is nothing certain about how the battle for 21st Century Fox will pan out. Christophe Morin/Bloomberg

Don’t count Brian Roberts out.

In meetings with investors in recent weeks, Comcast’s chief executive officer has made it clear he wants 21st Century Fox’s entertainment assets and will spare nothing to beat Walt Disney’s $71.3 billion offer. With Fox shareholders scheduled to vote July 27 on Disney’s bid, a deadline looms.

Comcast, the largest US cable provider, has been mulling next steps, including a possible partnership with private-equity firms, to compete with Disney. The company needs to sweeten its $65bn all-cash offer enough to win over Rupert Murdoch and his family, the largest shareholders of New York-based Fox. While the popular view is that Mr Roberts is competing for all of the Fox businesses for sale, at least one person familiar with his thinking says he could be open to splitting the assets. Comcast declined to comment.

The Murdochs remain concerned about potential antitrust hurdles for Comcast. Disney CEO Bob Iger says his company can’t even talk to Comcast under the terms of its agreement with Fox. That’s left Wall Street wondering when - or if - Mr Roberts will make a move and what it may be. Here are five possible scenarios:

Comcast comes back with a knockout bid

Philadelphia-based Comcast needs to bid $47 a share for the Fox assets, according to BTIG analyst Richard Greenfield. Disney is currently offering $38 a share in cash and stock, a mix that is more tax friendly to the Murdochs and other longtime Fox investors.

An all-cash bid for Fox at $47 a share, coupled with a higher £15 per share offer for British broadcaster Sky, would push Comcast’s leverage to five times earnings, according to Mr Greenfield, though cost savings and growth would lower that to less than four by 2021.

Mr Roberts would also have to show the Fox board that Comcast can win regulatory approval - a hurdle Disney cleared last week. Comcast is confident it’s not too far behind in that process, though the US Justice Department only formally began evaluating its offer last month.

In a broader sense, Comcast could win even if California-based Disney matched the offer. That’s because the debt added to Disney’s balance sheet would make it tougher for the entertainment giant to compete for future sports programming, Mr Greenfield said.

Comcast finds a partner

Comcast has been exploring the idea of teaming up with private equity and strategic investors to buy the Fox assets, which include film and TV studios, cable networks and the pay-TV operations Sky and Star India. The cable giant discussed the idea with Amazon.com, but those talks ended late last year, according to a person familiar with the matter.

Comcast could find a buyer interested in Fox’s regional sports networks, assuming regulators won’t let the company keep them. Disney won Justice Department approval for Fox by agreeing to divest all 22 of those channels.

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Read more:

US regulators conditionally approve Disney-Fox mega-deal

Pressure on Disney as Comcast bids $65bn for Fox assets

UK clears way for bidding war over broadcaster Sky

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Billionaire investor John Malone, the largest shareholder in cable giant Charter Communications, recently said that company could buy regional sports networks. A Charter spokesman declined to comment on whether the company would be interested. AT&T, which owns a few regional sports networks, may also be a buyer for the assets, which could fetch more than $10bn.

Finding a partner could allow Comcast to offer more for Fox without having to borrow more. On the other hand, if Comcast’s bid fails, the partners may be at a disadvantage in subsequent attempts to buy the sports networks if Disney takes a hard line against companies that forced it to pay more for Fox.

Comcast buys something else or several things

Fox’s lineup of movie and TV studios, cable networks and international businesses would provide Comcast with “global reach” and assets that “perfectly complement” the company, Mr Roberts has said.

Losing would leave Mr Roberts having to seek a number of one-off deals to achieve those objectives. On the studio side, the much smaller Lions Gate Entertainment is often seen as up for grabs. Comcast could still win its separate battle to control Sky, the European pay-TV provider already 39 per cent owned by Fox.

The company could also supercharge its wireless ambitions by seeking a telecom company like Verizon Communications. Comcast could even take a run at Charter in the belief that the Trump administration will look more favourably on cable TV mergers than regulators did under President Barack Obama in 2015 when Mr Roberts failed to buy Time Warner Cable.

Comcast splits the assets with Disney

While Mr Iger told investors his company has an agreement in place with Fox that “precludes” a carve-up of the assets, the idea has gained traction with some analysts.

Comcast could take the international assets and Disney could keep the domestic properties. The best result for bondholders of all three companies would be for Comcast to buy Sky, according to Neil Begley, a senior vice president at Moody’s. Mr Begley notes that both Comcast and Disney could have their credit ratings cut due to the heavy debt required in a Fox deal.

“A split decision is the best outcome,” Mr Begley said in a research note last week.

For Comcast, Sky - with its 23 million customers in five European countries - offers a rare opportunity to diversify out of the US and reach more consumers directly. The process carries its own potential regulatory challenges. The UK government has already cleared Comcast’s offer for Sky with regards to its impact on media plurality, but Britain’s Takeover Panel could still intervene on behalf of Sky shareholders to impose a minimum price for the company that reflects the value placed on Fox in the winning bid.

If its pursuit of Sky fails, Comcast may target another entertainment property, such as Sony Pictures Entertainment.

Comcast walks away

If Comcast walks away from Fox and Sky, its share price may rebound from this year’s 17 per cent loss. Some analysts have suggested investors need to be convinced that Sky is separately a worthwhile target and that Comcast shareholders may prefer that the company pursue a more aggressive share buyback or acquisitions in the wireless space, Gregory Williams, an analyst at Cowen & Co, said in a recent research note.