Will Comcast Bid Make Disney Sweeten The Pot For Fox Assets?

Comcast (NASDAQ:CMCSA) , as anticipated, didn’t lose any time to offer a higher price for 21st Century Fox’s (NASDAQ:FOXA) assets.

As soon as AT&T (NYSE:T) got federal approval for Time Warner acquisition, the cable giant submitted a $65 billion bid for Fox’s assets, which is a 19% premium to Disney’s (NYSE:DIS) $52.4 billion offer.

The ball is now in Disney’s court. The media giant can wait for Fox’s board decision (vote on Jul 10 that is expected to be postponed now) or can immediately try to outbid Comcast’s $65 billion all-cash offer.

Notably, since Disney’s announcement of the Fox deal (Dec 14, 2017), Comcast’s shares have lost 17.4%, as compared with Disney’s loss of 3.8%.

Who Will Fox Board & Shareholders Prefer?

Apparently, the company, which pays more, will be preferred by both the Fox’s board and shareholders.

In fact, a shareholder like TCI Fund Management, which owns almost 7.4% stake, per Reuters, believes that Fox’s board should sell the company to the highest bidder.

Comcast’s current offer seems to be water tight. Per Reuters, apart from the premium bid, the company has offered $2.5 billion as a reverse termination fee, in case the deal fails to pass regulators.

Notably, the reverse termination fee figure matches Disney’s offer. Additionally, Comcast will pay Fox’s breakup fee of $1.525 billion, which it would owe to Disney, if Fox’s board selects the cable giant.

Nevertheless, Rupert Murdoch’s (Fox’s largest shareholder with roughly 17% stake) preference for an all-stock deal can become an obstacle for Comcast. The company’s all-cash offer will attract huge capital gain tax, per tax experts, as cited by Reuters.

Will Disney Raise Bid?

Per Bloomberg, Disney has the right of refusal on any counteroffer under its agreement with Fox. Moreover, if Fox’s board prefers Comcast, Disney will have five business days to respond.

We believe Disney can raise its offer for Fox’s assets, given the significant synergies from the deal. The acquisition of majority of 21st Century Fox’s assets will significantly expand its content portfolio. Fox’s large library of TV shows and movies like The Simpsons and Avatar will also boost its competitive position against the likes of Netflix (NASDAQ:NFLX) and Amazon (NASDAQ:AMZN) Prime.

Further, Disney will have telecasting rights of Major League Baseball and NBA in the United States; Premier League, Serie A, Bundesliga and UEFA Champions League in the Europe; and Indian Premier League (IPL). The company’s international footprint will increase substantially by the addition of the aforementioned sports channels.

Moreover, Fox Networks International operates more than 350 channels in 170 countries, while Star India has 69 channels serving 720 viewers per month. The international expansion will help Disney to negate a slowing U.S. television business.

Comcast’s Debt Level to Shoot Up

Per Reuters, Comcast already has “Highly Confident Letters” from Bank of America (NYSE:BAC), Merrill Lynch and Wells Fargo (NYSE:WFC) for its 21st Century Fox bid. The “Highly Confident Letters” implies investment banking firms are confident about financing the deal.

Notably, as of Mar 31, 2018, the company’s total debt was $66.72 billion compared with $59.42 billion as of Dec 31, 2017. Comcast’s debt level is now further expected to increase, due to the higher bid for Fox as well as a $30 billion (£ 20 billion) offer for U.K.-based Pay-TV provider, Sky, in which Disney has also shown interest.

Per Bloomberg, if Comcast successfully acquires Fox and Sky, it could become one of America’s largest corporate borrowers. Rating agency Moody's has already warned that it may cut Comcast's A3 rating, citing higher debt levels.

Disney, on the contrary, has significantly less borrowings under its balance sheet compared with Comcast. As of Mar 31, 2018, total borrowings were $24.68 billion.

Moreover, Disney has a debt-equity ratio of 38.6% compared with Comcast’s 90.1%. Hence, the balance sheet strength provides ample opportunity to Disney to raise its bid for Fox’s assets.

Zacks Rank

Currently, both Disney and Comcast have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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