Comcast's Cut-Price Sky Bid

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(Bloomberg Gadfly) -- Offer to buy a company for less than its prevailing share price, and a wannabe buyer risks looking flippant. But Comcast Inc.'s decision to underbid for Sky Plc is more than just a tease.

On Wednesday, the U.S. media giant formalized its 12.50 pounds-a-share proposal to buy the British satellite broadcaster. Sky's board promptly dropped its endorsement of a 10.75 pounds-a-share offer from Rupert Murdoch's Twenty-First Century Fox Inc., which is itself being bought by Walt Disney Co.

The Comcast bid is superior on every level. The path to regulatory approval is clearer. Comcast has also made legally binding commitments to safeguard Sky’s news operation and support Britain’s creative industry.

It's hard to see why Sky's independent directors wouldn't now approve the Comcast offer. Their only pretext could be that the 50 percent-plus-one-share acceptance condition creates an element of uncertainty given Fox already has a 39 percent stake in the U.K. broadcaster.

Comcast shareholders don't like the idea of buying Sky judging by the stock price. Leverage would be uncomfortable, with net debt rising to more than three times Ebitda from 2.2 times at the year-end. That kills any prospect of share buybacks for a while.

But at this price, they should be forgiving. The offer values Sky at 28 billion pounds ($39 billion) on a debt-free basis based on balance-sheet forecasts for June. Comcast says the purchase would generate returns in excess of the cost of capital within a couple of years.

That's credible. Sky is expected to make 1.9 billion pounds of operating profit in its 2020 fiscal year. Add annual synergies of 360 million pounds from the takeover, and the return after tax would be about 7 percent pretty quickly. Bake in some synergy upgrades and within a few years returns could be higher.

But a bid at this price would probably still founder. Sky's shares were at about 13.10 pounds before Comcast's announcement and rose to 13.50 pounds afterwards. Sky shareholders know they own a trophy asset, and are rightly demanding a full price for it. Even if Fox withdrew, it’s uncertain they would take the current offer.

So what has Comcast achieved? At the very least it has killed the Fox deal or forced Murdoch or Disney to pay more. Disney can certainly afford it.

If Comcast wants to win, it will have to make a bid at about the current share price. This could be justified if it found further synergies. Or if Comcast could persuade its own shareholders to wait a bit longer for acceptable returns to come through.

Is Comcast serious? It has gone through the rigmarole of devising its commitments on conduct. As in the landmark takeover of GKN Plc, it's having to break new legal ground to so. What's more, the firm offer involves paying commitment fees on the financing. That suggests Comcast is more than just larking around. But until it makes a knock-out bid, investors will have their doubts.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2018 Bloomberg L.P.

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