Following the news that Comcast has made a bid for Sky, a number of industry observers have shared their thoughts on its implications for the pay-TV sector with advanced-television.com.
According to MoffettNathanson’s Craig Moffett, for Comcast shareholders, there is a mix of good and bad in the announcement of a topping bid for Sky. “Unfortunately, the bad outweighs the good,” he suggests.
“The good is that Comcast would get additional distribution for NBCU content in Europe, and some European content to distribute in the US. 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. To be fair, however, such benefits could in theory be achieved just as easily through arms-length negotiations.”
“The bad is that the underlying technology here is satellite, and Comcast will have to twist themselves into knots to explain why satellite distribution won’t be just as obsolete in Europe as it already is in the US. 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. 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 US, lacks any competitive advantage whatsoever.
“Perhaps worst of all, this morning’s bid doesn’t really put to rest the idea that they might still try a topping bid for Fox’s US assets, including the rest of Sky, if the AT&T/TWX deal is approved. The notion that Comcast might make a topping bid for Fox has weighed heavily on Comcast shares, which have entirely missed the market rebound in the days since their continued interest was first reported. Expect that overhang to remain.”
Meanwhile, Mohammed Hamza and Tony Lennoir, analysts at Kagan, the TMT research arm of S&P Global Market Intelligence, say that Comcast’s proposed acquisition would create the world’s second-largest pay TV distributor while sharpening the Philadelphia heavyweight’s edge on the content front, notably through valuable English Premier League rights — one of the most valuable global sport franchises.
“Separate from Comcast’s international ambitions, the bid roils the latest plans from the segment’s biggest players. The Sky assets are already deeply intertwined with Walt Disney Co.’s bid to buy 21st Century Fox Inc., and the Comcast offer is likely to elicit further escalation from Disney,” they say.
“Although clearly both Comcast and Disney want Sky, Comcast has said it will pursue a deal as long as it can acquire at least 50 per cent of Sky. Thus, Comcast may allow Fox and eventually Disney to retain their 39 per cent stake, perhaps negotiating the final ownership structure of Hulu LLC at the same time — Disney will own 60 per cent of Hulu after the Fox acquisition and Comcast 30 per cent, with both parties said to be interested in owning the company,” they note.
According to Kagan, the Comcast bid for Sky certainly gives the Murdochs pause for thought regarding the existing Disney-Fox deal, especially given Comcast’s £12.50-per-share bid for Sky, a 16 per cent premium on Fox’s offer. Kagan believes the Comcast offer for Sky represents a more attractive strategic alignment that brings together similar expansion ambitions of two pay TV giants with diversified asset investments in content ownership and distribution — Sky’s 119 TV networks in Europe and Comcast’s NBCUniversal Media LLC ownership — as well as technology including virtual reality, IP distribution, next-generation advertising and over-the-top video. “From a European regulatory perspective, we think the Disney deal would in any case resolve most if not all of the regulatory issues as would a deal with Comcast buying Sky,” they suggest.
“Following AT&T Inc.’s bid for Time Warner Inc. and Comcast’s own programming stronghold with its acquisition of NBCU in 2009, the move contributes to an increasingly vertically consolidated media landscape,” they advise.
In terms of the bid’s financial implications, Comcast’s February 27th bid to acquire Sky consists of £21.55 billion in equity, or £12.50 per share, translating into $30.01 billion. With the assumption of calculated net debt of £7.43 billion, or $10.35 billion, this values the European media and telecommunications conglomerate at £28.98 billion ($40.36 billion) or 12.7x projected 2018 EBITDA — a multiple significantly above US cable’s largest deals. For perspective, Disney announced its bid for the Fox assets at 11.9x, 8.3x including synergies and using a 30-day moving average. It was closer to 12.9x and 9.0x with synergies when the deal was announced, before the stock’s significant increase on deal rumours.
Charter Communications Inc.’s $77 billion acquisition of Time Warner Cable Inc. in 2015, the largest US cable deal ever, was done at a calculated 9.3x projected forward EBITDA. Altice NV’s acquisitions of Suddenlink Communications and Cablevision Systems Corp., also announced in 2015, fetched 9.3x and 9.4x multiples, respectively. The metric has risen steadily in the US cable M&A market in the last two years, however.
Based on public data and Kagan estimates, the annual weighted average forward EBITDA multiple for U.S. cable M&A came in at 10.1x, the metric’s highest level since 2005.
Three US cable deals were struck at forward EBITDA multiples in double-digit territory in 2017: Cable One Inc.’s acquisition of NewWave Communications (11.0x); TPG Capital’s purchase of Wave Broadband LLC (12.3x); and the sale of the MetroCast systems to Canada-based, and owner of Atlantic Broadband Group LLC, Cogeco Communications Inc. (11.0x).
On a subscriber-valuation basis, Comcast’s offer for the Sky assets comes in significantly below prevailing US metrics. Based on the estimated enterprise value of $40.36 billion, which includes programming assets, Comcast would be paying slightly more than $2,000 per Sky multichannel subscriber. This compares to the average $6,985 per video subscriber that Charter paid to acquire Time Warner Cable in 2015.
“Sky’s European pay TV assets cover 22.9 million customers across Austria, Germany, Ireland, Italy and the U.K., including an estimated 20 million legacy multichannel subscribers. Sky is the largest pay-TV platform in Europe with some of the region’s highest ARPU levels, averaging $48.77 in the six months ended December 31st, 2017, based on an average annual exchange rate for 2017,” they note.
“Comcast counted 22.4 million pay TV subscribers at the end of 2017 and a stable of cable networks and the NBC (US) broadcast asset. A combination with Sky would make Comcast the second-largest pay -TV operator in the world, up from its current fourth position, behind only China Telecom with 73.3 million pay-TV subs and ahead of AT&T with 38.9 million subscribers globally. The relatively high price for satellite subscribers has raised eyebrows, particularly when compared with the gloomy outlook for multichannel services when not paired with wireline broadband,” they observe.
According to Kagan, a merger would, however, allow Comcast to flex its programming muscle at a time when legacy multichannel distributors are increasingly aiming for differentiation. The English Premier League, England’s top-flight football league and one of the most (if not the most) popular football leagues in the world, could very well be Sky’s content crown jewel.
Sky in February agreed to pay £3.58 billion, or $4.98 billion, over three years (effective beginning with the 2019-20 campaign) for the rights to broadcast 128 EPL games per season, including every weekend ‘first pick’. Over the long run, Sky’s established relationship with the EPL could prove extremely valuable in the perspective of an international Comcast virtual-service-provider product.
“The underlying issue is how important the Sky assets are to Disney as a basis for the Fox acquisition. Kagan believes the ideal outcome for all involved would be Sky selling to Comcast and Disney taking on Fox minus Sky,” conclude the analysts.
According to VideoAmp’s Chief Strategy Officer Jay Prasad, the frenetic chess moves in the media industry have become a non-stop spectator sport for those of nerds who live and breathe this daily! “This time you literally have three of the most powerful moguls in the world involved, Brian Roberts (Comcast) Bog Iger (Disney) and Rupert Murdock (Fox). What’s at stake here is very layered and will definitely shape the future of TV and advertising,” he states.
Prasad sees a number of strategic levers at play:
Jason Bradwell, Director of Product Marketing at Massive Interactive, suggest that in kicking off a bidding war for Sky, Comcast is about to secure its place at the top of the OTT-first broadcaster league table. “Although it would represent a huge up-front cost for the cable operator, it’s one that’ll pay dividends almost immediately thanks to the international headroom the deal would open up for the company,” he predicts.
However, it’s also indicative of a shift to an OTT-first mentality from the cable operator. With Sky recently announcing it’ll offer all of its services via IP by 2019, and plans for aggressive growth into Europe, Comcast is hedging its bets on securing prime position amongst a generation of users that favour cord-cutting.”
“In bidding for Sky, Comcast is really bidding for an immediate global footprint. That’s a given. But it’s also a move that’ll reshape Comcast’s content delivery and growth potential at such a volatile time in the industry. Deals like this will redefine the broadcast space as we know it,” he concludes.