Why Comcast Is Paying Dearly for Britain’s Sky

(Bloomberg Businessweek) -- Last November, Comcast Corp. Chief Executive Officer Brian Roberts was in a London taxi when he started chatting with the driver, who “was incredibly knowledgeable about the difference between Virgin and Sky in every feature,” Roberts told reporters earlier this year, referring to Britain’s pay-TV rivals. “We were learning a lot there.”

Sky’s surprisingly strong connection to U.K. customers, as demonstrated by the cab driver, helped convince Roberts that the European company was worth a princely sum. Over the weekend, Comcast outbid 21st Century Fox Inc. in an auction for control of Sky Plc—a satellite-TV company with a TV studio and valuable sports rights, including Premier League soccer. Its winning bid: $39 billion, more than double what media investors estimated the company was worth when it went on the block in 2016.

Many investors don’t share Roberts’s vision, and on Sept. 24, Comcast’s shares fell as much as 8 percent as Wall Street worried that its global expansion will cost too much. “They grossly overpaid,” says Craig Moffett, an analyst at MoffettNathanson LLC.

The Sky deal would propel Comcast’s debt to at least $100 billion, placing the company among a small group that have borrowed that much, including AT&T Inc., which in June closed on its $85 billion purchase of Time Warner Inc. The debt could go even higher now that Fox on Sept. 26 said it will sell Comcast its 39 percent stake in Sky, worth more than $15 billion—a decision that required approval from Walt Disney Co., which is buying most of Fox.

Comcast executives say they’re confident they can generate enough cash flow to pay down their debt over time. For now, the company’s credit ratings are unchanged, though an S&P Global Ratings analyst has given it a negative outlook. But the success of the deal depends on continued strength at its U.S. business and the combined TV giants fending off the global rise of streaming rivals Netflix Inc. and Amazon.com Inc.

Comcast, which has been losing thousands of U.S. cable-TV customers, is staking its future on high-speed internet service. Internet subscriptions are still growing, but if AT&T and Verizon Communications Inc. can deliver ultrafast wireless service, they could make Comcast broadband irrelevant.

The company also owns NBCUniversal, a collection of broadcast and cable channels, a film and TV studio, and theme parks. By owning both TV programs and the pipes that deliver them to homes, Comcast has created a hedge in a fast-changing landscape where it’s uncertain whether content makers or distributors are better positioned.

Sky is essentially Comcast’s European twin, with about 23 million customers, mostly in the U.K. and Ireland. With Sky, the U.S. company would almost double its customer base. Like Comcast and its X1, Sky sells a box called Sky Q, which has a slick interface that makes it easier to find what to watch—and provides a rich source of data on customer viewing habits. Unlike Comcast, Sky is still gaining video customers.

The two companies could benefit from being under the same roof. For instance, Comcast and Sky could have their studios team up to create more original TV shows for Sky’s online service. That could provide a bulwark against the rise of Netflix, Amazon, and Home Box Office Inc., which are spending billions of dollars in a global race for online TV customers, especially in Europe. Perhaps most important, as more Americans drop their cable-TV subscriptions, Sky offers Comcast a foothold on a continent where cord-cutting hasn’t taken off yet.

“The industry changed under Brian’s feet, and he reacted to it,” says Leo Hindery, managing partner of InterMedia Partners LP and former CEO of cable giant TeleCommunications Inc., which was sold to AT&T. “He saw some weakness in his hand here and said, ‘Where do I go next?’ There’s no big play for him in Asia or Latin America. The only other place he could go is Europe.”

Globe-trotting is fairly new for Comcast, which built its business by acquiring regional franchises that had extended cable into parts of the U.S. far removed from urban centers. Gain control of a remote system, then defend it; that was the business. But by the time Roberts became president of Comcast in 1990, satellite TV was jeopardizing cable’s dominance in the American living room. Now an even greater threat is coming from deep-pocketed tech companies that are invading Hollywood, stealing talented producers, and siphoning away TV customers with a strong library of online entertainment at a cheaper price.

When Comcast gains control of Sky, one of its first tasks will be introducing itself to European consumers who’ve never heard of it, according to Alice Enders, head of research at Enders Analysis. “The brand isn’t familiar to people here at all,” says Enders, who’s based in London. “People are still wondering, Who is this company?”

That fresh start could be an advantage for Comcast, whose reputation in the U.S. has been damaged by its history of frustrating customer service. It’s expected to continue using the Sky brand name, so consumers may never notice the new American overlord. Roberts has also tried to ease concerns in Europe by pledging to preserve Sky News’s independence. On a February call with analysts, he even offered an olive branch to Anglophiles by mentioning how a Comcast studio had produced the popular British TV series Downton Abbey.

Recently, Roberts has also tried to clear up misunderstandings on Wall Street, explaining that buying Sky—and his failed pursuit of Fox’s assets—doesn’t mean he’s soured on Comcast’s core business in the U.S. “Any deals we’re doing, we’re trying to play offense in a belief that we, over the long term, can create exceptional shareholder value,” he said at a conference in September. “Sometimes that’s hard to prove on Day 1. Over time, we hope we can do so.”

To contact the editor responsible for this story: James Ellis at jellis27@bloomberg.net

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