Sky Is Suddenly Hot as Disney, Comcast Pursue Stake in Fox Talks

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(Bloomberg) -- The biggest prize for Comcast Corp. and Walt Disney Co. in talks for 21st Century Fox Inc.’s assets -- even bigger than the studio that makes the X-Men movies or the network that airs “American Horror Story” -- may be a 39 percent stake in a European pay-TV service.

With 22.5 million customers in five countries and leading technology, Sky Plc is suddenly a hot commodity in the battle over who buys the Murdoch film and TV empire. The interest marks a reversal in sentiment for the London-based media company almost a year to the day since Fox announced a bid for full control of Sky, whose shares were near their lowest point since 2012.

Sky offers Comcast, the largest U.S. cable provider, and Walt Disney Co., the biggest U.S. media company, something they both need at a time when new online TV competitors are surging around the world: a global footprint. Europe’s pay-TV market hasn’t been ravaged by cord-cutting like the U.S. industry, and some parts of the region are still growing. Sky’s subscriber base has been expanding in Germany and Italy.

“Media companies are increasingly becoming global in scale, with Netflix and Amazon leading the charge,” said Kannan Venkateshwar, an analyst at Barclays Plc.

Fox’s Sky stake is valued at almost $9 billion, based on trading Friday. Disney and Comcast’s talks to acquire Fox’s studio, cable channels such as FX, Star India and National Geographic, and the Sky stake have been valued at $40 billion to $60 billion, depending on how much debt is included.

Comcast considers Sky’s technology superior to European rivals, a key reason it’s interested in buying Fox’s assets, according to person familiar with the matter. Sky’s Now TV, a streaming service that doesn’t rely on beaming programming over satellite, offers lessons as Comcast dips its toes into the online world. And as brands shift spending online, Sky’s advertising platform is helping it hold onto marketing dollars by offering clients ways to reach specific demographics.

Both companies also produce original programming. Sky subscribers get exclusive shows like the drama “Riviera,” starring Julia Stiles. Comcast owns the U.S. broadcast network NBC, home to “This Is Us,” and has the rights to the Olympics and National Football League games.

With Comcast as its owner, Sky would be able to negotiate better terms for carrying networks on pay TV, such as in deals with Fox, Discovery Communications Inc. or Time Warner Inc.’s HBO, said Mostyn Goodwin, a partner at OC&C Strategy Consultants in London.

“There are obvious synergies back into the Comcast cable business and into the NBC channels business,” Goodwin said.

Disney’s Plans

Meanwhile, Disney Chief Executive Officer Bob Iger has talked about the need for his company to sell its content directly to consumers. Disney even once considered buying Twitter Inc. for that reason. Disney could use Sky’s large subscriber base to help market the subscription video services it plans to launch in the next two years. 

“Disney could look at Sky as the necessary piece to significantly accelerate its global OTT push,” Michael Nathanson, an analyst at MoffettNathanson, said in a recent note, using the industry term for online video services.

Sky’s clout in sports fits naturally with both Disney and Comcast. As the dominant broadcaster of British soccer, Sky holds some of the world’s most valuable sports rights contracts.

Disney’s ESPN plans to unveil a subscription video service next year and could add Sky’s soccer content to that, said Barton Crockett, an analyst at FBR Capital Markets & Co. Adding Sky’s rights to a direct-to-consumer subscription package for soccer fans that Comcast’s NBC Sports started this year would bolster that service, too. NBC has a similar service for rugby -- a sport that would play well to Sky’s British base.

Soccer Rights

But owning Sky would also expose Disney and Comcast to the rising costs of soccer TV rights -- a challenge that threatens them in the U.S. as they lose pay-TV subscribers. The 70 percent increase in the cost of U.K. Premier League matches at the most recent auction in 2015 caused a 6.2 percent drop in Sky’s operating profit. Further inflation is a risk, given potential bids from deep-pocketed tech giants like Amazon.com Inc. and Facebook Inc.

It’s also not clear whether Disney or Comcast would need to reapply through British regulators to acquire the 61 percent of Sky that Fox doesn’t already own, with Fox’s bid currently under review. Both companies are interested in owning all of Sky, not just Fox’s 39 percent stake.

Potential Upside

Either way, the flurry of interest is good news for Sky investors. With Fox’s 10.75 pounds-a-share bid for the company still on the table and likely acting as a minimum valuation, Sky’s shareholders could be in line for a payout of up to 12 pounds a share if a deal with either Disney or Comcast is done, said Alex DeGroote, a media analyst at Cenkos Securities.

“Comcast, Disney, all these companies, they have synergies to offer that would need to be reflected in any deal for Sky,” DeGroote said.

The prospect of a bigger payout for Sky shareholders wasn’t envisioned by analysts a year ago. Fox’s bid came after a 30 percent drop in Sky shares since the beginning of 2016, over concerns about sports-rights inflation and perceived risks tied to the U.K.’s exit from the European Union.

©2017 Bloomberg L.P.

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