The unwinding of Rupert Murdoch’s media empire, via the sale to Bob Iger’s Disney of his stake in Sky and his prime entertainment assets in 21st Century Fox, was never likely to be a trouble-free affair for the media tycoon. And so it proved last week when Comcast, the US cable giant led by Brian Roberts that owns the NBC broadcasting network, launched a £22bn takeover bid for Sky, seemingly out of nowhere.
The $66bn Disney deal is complicated as it is, because wrapped within it is Murdoch’s ongoing attempt to buy the 61% of Sky that he doesn’t already own. If the regulators approve both transactions, the 86-year-old will get to hand over 100% of Sky to Disney as an extra gift. But if Comcast gets its way and snaps up a majority stake from Sky’s independent shareholders, the plan could unravel. Here are the answers to questions posed by the deal.
Why is Sky so attractive?
For all the competitive threats posed by Netflix, Amazon and Apple, Sky is Europe’s largest pay-TV operator: with 22 million customers, it’s a money-making machine, producing almost £2bn in annual profits. As the UK market reached saturation, Sky’s move in 2014 to buy its sister companies in Germany, Austria and Italy has given it that most attractive of draw cards: scope for significant growth. Sky has also been successful in launching on-demand services, such as Now TV, that go beyond the constraints of the satellite dish and meet the challenges of the Netflix era. Since changing the face of British pay-TV by acquiring the rights to Premier League football almost three decades ago, Sky has also become a major entertainment player, spending more than £2bn annually on dramas such as Riviera and Fortitude, doing licensing deals for shows including Game of Thrones and Billions, and buying production companies, among them the maker of The Great British Bake Off.
“Sky has persuaded households across Europe not just to pay significant money to watch TV, but also to buy broadband, telephony and more recently mobile,” says Alex DeGroote of stockbroker Cenkos. “It is a one-off opportunity to buy a clear strategic asset in the European media landscape. It will go for a big price.”
Why are media giants Comcast and Disney so keen?
US media groups are seeing growth slow dramatically in their home market and searching abroad for a more dynamic bottom line. For Comcast, a Sky deal would make it the world’s largest pay-TV operator, and increase its non-US revenues from 9% of the total to 25%. Then there is the need to meet the global digital threat from deep-pocketed Silicon Valley rivals.
“The arrival of Netflix and players like Amazon and Apple puts US companies like Disney, Comcast and Fox up against powerful new competitors,” said Jerry Dellis of investment bank Jefferies. “To compete, these formerly US-centric businesses need more global reach. Sky provides a direct route to customers in more countries.”
The reason Murdoch is selling most of 21st Century Fox, and Sky with it, is because his empire hasn’t been able to grow fast enough to fight the tech threat after his $80bn bid for Time Warner failed in 2014. Disney, which is withdrawing its content from Netflix in the US in order to launch its own streaming service, has spied a chance to build its content and distribution power further with the Fox deal.
Disney would add franchises including X-Men, Avatar, Ice Age and Deadpool from Fox’s film studio, as well as TV shows such as The Simpsons and Modern Family, to its universe of superhero films and its Star Wars properties. And Sky’s burgeoning streaming service, Now TV, would be a valuable platform for taking on Netflix and Amazon outside the US. Comcast, which owns the makers of Downton Abbey and Made in Chelsea, made a play for Fox but was rebuffed by Murdoch. Now it is aiming to take out the Sky part of his media empire directly.
What would being owned by Comcast mean to Sky and the Murdochs?
Comcast is seeking to buy 51% of Sky, and has said it could live with the Murdochs or Disney as minority shareholders, but it hopes to engineer a full takeover. The Murdochs have already decided to sell Sky to Disney – either Fox’s 39% stake, or all of it if they can get their £11.2bn deal to buy the rest of it past UK regulators. So on the face of it, selling to higher bidder Comcast might seem attractive. If the aim is to focus on newspapers and Fox News, why shouldn’t Murdoch seek the highest price possible for his Sky stake?
“I don’t think Murdoch wants to sell his shares to Comcast, but I assume he will,” says Alice Enders of Enders Analysis. “He wants to secure 100% of Sky, and then sell to Disney. He has sold 39% of Sky to Disney already. The key point is what Disney is going to do.”
‘Comcast can’t believe it will get Sky at the price offered. We should see this as an opportunistic opening salvo.’
Alex deGroote, analyst
Whoever triumphs, Sky’s fate is sealed. After being one of the UK’s biggest media companies for three decades, it will move into full foreign ownership.
“If Comcast were the buyer, we think Sky would still be very much in control of what it is doing in the UK, given Comcast has no pay-TV expertise in this market,” said Sarah Simon of investment bank Berenberg. “We’d expect Sky’s small content production assets to be folded into Comcast’s NBC Universal though, and for close collaboration between that business and the Sky commissioning department.”
Can Murdoch still win and hand over Sky to Disney?
“Of course he can win, if he offers more,” says Berenberg’s Simon. “We think he would need to offer a decent premium to the Comcast price, given that shareholders in Sky also have to assess the regulatory risk associated with the Fox bid. We don’t see any regulatory issue with the Comcast deal.”
Murdoch is committed to Disney, so if he wants to raise his offer for Sky he would have to effectively get permission to do so. Disney has called the pay-TV broadcaster a “crown jewel” among the $66bn of Fox assets it is buying.
“Whatever happens, for the Murdochs this should be seen as a chance to get a cash exit,” says DeGroote at Cenkos. “Comcast can’t believe it will get Sky at the price offered. We should see Comcast as an opportunistic opening salvo.”
If Murdoch misses out on taking over Sky, and then US regulators block the Disney/Fox deal, the media mogul would suddenly find himself with a “sub-scale collection of mainly US assets”.
What does it all mean for investors and TV viewers?
A looming bidding war is good news for Sky investors. Sky shares were was trading at 769p the day before Murdoch made his offer in December 2016. Now the most bullish prediction is that Sky might be taken out at £16. For viewers, there will be little change, and with Netflix and Amazon vying for consumers, a takeover is unlikely to see major price rises for Sky subscriptions.
Comcast has pledged to increase original TV and film content, and Disney would probably do the same, which means more shows like Riviera, Fortitude and The Tunnel.
The intrigue may lie in the Premier League TV rights auction in two years’ time. Sky has just secured prime TV packages for the 2019-2022 seasons at a discount of £200m annually over its current deal. This surprised analysts, who had expected higher bids and modelled a hefty increase in costs into Sky’s outlook as a result. The deal also prompted Comcast to break cover.
The question is if Comcast, or Disney, becomes Sky’s new owner, what will be the appetite for more Premier League football? Especially if a digital player like Amazon, which is still involved in bidding for two smaller unsold packages of games, decides to become a force in British football broadcasting next time.
The speculation over Sky’s future will rumble on, regardless of who emerges as its owner.