Comcast (CMCSA 35.30, -2.60,-6.86%) is trading lower after the company won an
auction to acquire Sky plc (SKYAY 90.15, +7.25, +8.75%) for $40 bln.
The deal gives Comcast significant European exposure when it was previously just focused on the American market.
Comcast is essentially doubling down on its content plus distribution strategy while diversifying away from the US market, where video distribution is under more pressure.
Analysts are not especially keen on this strategic deal due in part to the valuation, which rose considerably. Comcast is paying a mid-teens EBITDA multiple for Sky, close to double what Sky was trading at one year ago. The GBP17.28 per share purchase price is 38% above Comcast's offer from late February and 17% above the raised offer from July. Comcast traded at just 8x EBITDA heading into today.
Both MoffettNathanson and Oppenheimer downgraded the stock this morning.
On the other hand, Disney (DIS) +2% shareholders are happy that Fox (FOXA) +1% did not succeed in acquiring the portion of Sky it did not already own. The question is whether Fox will tender its 39% of its Sky ownership to Comcast or hold on to it and transfer it to Disney in their large transaction.
With over 20 mln subscribers, Hulu is a prized streaming asset in a world where over-the-top (OTT) and direct-to-consumer (DTC) offerings continue to weigh on traditional pay-TV businesses. Disney will gain 60% of Hulu in its deal with Fox, but Comcast will still own 30%.
Sky plc is a top pay TV provider in the U.K., Germany, and Italy. Sky Broadband is a leading (#2) residential broadband provider in the U.K./Ireland. The deal will give Comcast more than 50 mln customer relationships, up from 29.8 mln at the end of the second quarter.
Sky News is also a top European cable news network, and there are additional Sky channels for sports, entertainment, and the arts. Sky boasts exclusive partnerships in Europe with HBO, Showtime, and Warner Bros; original content creation through Sky Original Productions (50+ Sky Original Productions) and is the owner of TV rights to English Premier League soccer matches for three years starting in 2019. Sky also owns NOW TV OTT (~2 mln subscribers).
Comcast's leverage will rise to 3x but ample free cash flow can service the company's debt. Comcast currently has a $160 bln valuation with a 2% dividend yield.
One would expect media M&A to cool off after a series of landmark deals in 2018 but potential deals will likely remain on investors' minds as the media sector continues to evolve.
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