Breakingviews: Investors Bet That Fox and Disney Will Toss Financial Sense Aside


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Joe Raedle/Getty Images

Deals rarely look as good on paper as they do in a chief executive’s head. Comcast’s $31 billion offer for the British satellite broadcaster Sky just about passes financial muster. Investors expecting a higher bid from Rupert Murdoch’s 21st Century Fox, with backing from the Walt Disney Company’s boss, Robert A. Iger, are betting on the triumph of sentiment over spreadsheet.

Comcast, the cable giant run by Brian L. Roberts, firmed up its offer of 12.50 pounds per Sky share on Wednesday, beating Mr. Murdoch’s December 2016 bid by 16 percent. The move endangers the mogul’s plan to sell Fox — including Sky — to Disney for $52.4 billion in stock. It also dashes any hopes that Mr. Iger and Mr. Murdoch could persuade Mr. Roberts to back away by offering him an alternative asset, like the streaming service Hulu. Assuming British regulators clear both bids, it’s a straightforward battle on price.

Comcast has the stronger hand. On Wednesday, the $155 billion company said it had identified $300 million of annual pretax cost savings and a further $200 million of gains from combining Sky’s TV shows and movies with Comcast’s NBCUniversal library. Generously add those to consensus estimates for Sky’s operating profit in 2020, tax the lot at 18 percent, and the return on invested capital is almost 7 percent. That’s just about in line with cable groups’ cost of capital, according to New York University estimates.

It’s hard to see how Mr. Murdoch and Mr. Iger could justify going higher. The House of Mouse has less overlap with Sky’s core business as a distributor of video entertainment. Second, Comcast has greater firepower: Its debt is low for a cable group, and its Ebitda — earnings before interest, taxes, depreciation and amortization — this year will be greater than Disney’s and Fox’s combined, according to Eikon estimates. Besides, Comcast’s dual-class stock means Mr. Roberts does not have to fret about shareholders blocking his plans.

Mr. Iger might conclude that Sky is crucial to his European expansion. Mr. Murdoch will be reluctant to part with the company he spent decades building and might want to hang on to Fox’s 39 percent stake in case the wider Disney tie-up collapses. Nevertheless, investors who pushed Sky shares up 4 percent to £13.57 on Wednesday are wagering that Disney and Fox will disregard financial sense.

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Comcast Starts Bidding War With 21st Century Fox for Sky


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Sky’s headquarters in London. Comcast’s $30.7 billion offer for Sky puts the American cable giant in a takeover battle with Rupert Murdoch for control of the British broadcaster.

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Andrew Testa for The New York Times

LONDON — Comcast formally unveiled a $30.7 billion takeover bid for Sky on Wednesday, putting the American cable giant squarely in a takeover battle with Rupert Murdoch’s 21st Century Fox for control over the British satellite broadcaster.

The terms of the long-awaited proposal were good enough to prompt Sky to withdraw its recommendation for Fox’s $16 billion bid for the 61 percent of Sky that it does not already own.

Comcast’s move seizes upon Fox’s troubles in getting government approval for its bid, which was announced in late 2016. British regulators have questioned whether buying Sky, which operates the 24-hour news channel Sky News, would give Mr. Murdoch too much control over the country’s news media, given his ownership of newspapers like The Times of London and The Sun.

It also changes the calculus for Fox and its ally Walt Disney, which has already announced a $52.4 billion bid for most of Fox’s businesses. Both have already offered concessions to allay regulators’ concerns, including an offer to sell Sky News to Disney. But now they may be forced to pay up to win Sky, which has customers in Austria, Britain, Germany, Ireland, Italy, Spain and Switzerland, and holds broadcast rights to the English Premier League and other professional sports competitions.

Under the terms of its offer, Comcast would pay 12.50 pounds, or $17.45, a share in cash for each Sky share. Fox has offered £10.50 a share.

Hoping to press on Fox’s weak spot, Comcast said that it was committed to Sky News’s editorial independence, offering to set up a board for the news unit and maintain its funding. Comcast, which owns NBCUniversal, also repeated pledges to increase investment in Britain’s film and television industries.

“We will invest to grow and enhance Sky’s business and be a strong steward of its valuable brand,” Brian L. Roberts, Comcast’s chairman and chief executive, said in a statement. “Sky is a great British business — with us, that’s the way it will always be.”

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The Future of Time Warner, Coming Soon to a Court Near You


The media industry has undergone significant change since the blockbuster deal was announced in October 2016.

Rupert Murdoch, who pursued Time Warner just three and a half years ago, has gone from buyer to seller, and made a deal to hand over much of his 21st Century Fox empire to Disney for $52 billion. Discovery made a bid and has now closed on an $11.9 billion deal for Scripps Networks Interactive, the home of cable channels like HGTV and Food Network. Viacom and CBS Corporation are exploring the possibility of joining once more.

All the while, digital rivals keep tossing money around.

Netflix is now spending up to $8 billion a year on content, up from $6 billion in 2016. Its free cash flow could balloon to negative $4 billion this year but its market value has skyrocketed to $139 billion from roughly $54 billion since the Time Warner-AT&T deal was announced.

Apple is competing directly with HBO, TBS and TNT by pouring what will soon be in excess of $1 billion into original programming, building relationships with Hollywood stars like Reese Witherspoon, Kristen Wiig, M. Night Shyamalan and Steven Spielberg. Amazon has appointed a new leader, and Hulu is beginning to find its sea legs. And even Facebook and Google’s YouTube are offering Hollywood tens of millions of dollars to buy up original content.

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HBO continues to be a juggernaut for Time Warner, producing hit shows like “Westworld” and “Game of Thrones” (above).

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Helen Sloan/HBO

And while Netflix, Amazon, Facebook, Google and Apple have opened their wallets, Time Warner has been sitting on the sidelines.

“It’s bad in the sense that that’s a lost year and a half from business planning perspective,” said Brian Wieser, a senior analyst at Pivotal.

A Time Warner spokesman said the company was “confident they would prevail at trial.” He would not speculate on what would happen should the judge, Richard Leon of the United States District Court of the District of Columbia, rule for the government.

The Justice Department argues that since AT&T has such a wide distribution network (it owns DirecTV), a deal could spell disaster for consumers. AT&T has countered that costs for consumers would likely go down.

Though Time Warner has been in a state of limbo for the last 18 months, analysts agree that its core businesses have been performing well.

“The wheels certainly haven’t fallen off,” Mr. Wieser said.

And while some think the deal being blocked will scare off potential suitors, there are many analysts who are convinced that Time Warner is too attractive to sit alone for long. For example, could HBO and Warner Bros. be sliced off and sold to companies like Apple or Amazon? The networks TNT and TBS to an entity like Viacom?

“If there is a demand for other media assets, there is nothing on the scale of Time Warner anymore,” said Kannan Venkateshwar, an analyst at Barclays Capital. “That gives it a scarcity value.”

Mr. Venkateshwar also pointed out that Time Warner would benefit from the new tax law, which would give the company even more runway if it has to go another year or two by itself.

Another analyst, Amy Yong, at Macquarie Group, said: “You can’t really dismiss how powerful HBO is. And Warner Bros. the studio. And, even to some extent, Turner and CNN. These are great consumer brands.”

HBO continues to be a juggernaut, producing hit shows like “Westworld” (which returns next month) and “Game of Thrones.” The network’s annual revenues now exceed $6 billion. It also now has five million digital subscribers, proving that it has made a steady transition into the over-the-top world.

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In one of media’s major changes, Rupert Murdoch, who pursued Time Warner three and a half years ago, has gone from buyer to seller. He made a deal to hand over much of his 21st Century Fox empire to Disney for $52 billion.

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Cameron Spencer/Getty Images

Warner Bros., propelled by the blockbusters “Wonder Woman” and “It,” had a strong year at the box office, and the studio had revenues of nearly $14 billion. And since Donald J. Trump announced his presidential run nearly three years ago, CNN has set ratings records.

Still, HBO’s longtime spot in the pole position of the television industry isn’t so certain. In 2015, Netflix had 92 fewer Emmy nominations than HBO. Last year, the gap was just 20. Netflix and Amazon now spend more on content than HBO, and it could simply be a matter of time before Apple does as well. Indeed, HBO executives now speak about the network more as a high-end boutique — curators of content, they like to say — than as the free-spending New York Yankees of the industry.

Warner Bros., among its slate of hits, also had several misfires, like “Justice League” and “King Arthur: Legend of the Sword.”

And though CNN’s revenues have grown, it hasn’t been at the rate of MSNBC and Fox News, which draw more viewers in prime time. TBS and TNT, and Turner’s slate of cable channels, continue to experience ratings declines as more consumers cut the cord.

Nevertheless, the research firm MoffettNathanson has told investors that Time Warner’s upside “has been overlooked because it is tied up in deal hell.”

The firm believes that if the AT&T acquisition falls apart, Time Warner could be split up and sold to the highest bidder — and perhaps even thrive as a result.

“The separation of Time Warner would likely draw two distinct sets of bidders into the marketplace,” it told investors. “On the content side, we would expect to see interest from current film entertainment competitors like Sony and CBS/Viacom and even new scripted digital entrants like Apple or Amazon. As for Turner, we would think there would be interest from existing cable network operators like Viacom or Discovery.”

But what would the ripples be if the deal collapses?

“Let’s just say they also block the Fox-Disney acquisition for some reason, that would all of a sudden make you go, ‘Oh, there’s actually an active effort to restrain the size of business,’” Mr. Wieser said. “That’d have an effect on all industries, not just media.”

Most analysts regard that outcome — both the AT&T-Time Warner and Fox-Disney deals being blocked — as unlikely, but the question becomes far more existential for Time Warner and its direct peers if the AT&T deal goes down. If they aren’t allowed to scale up to compete with Silicon Valley, how long could they be around?

“You suddenly have, from scratch, for the last six or eight years, $15 billion being spent by Amazon or Netflix,” Mr. Zaslav, the Discovery chief executive, said. “That could soon be $20 or $25 billion. It’s important for the ecosystem to not allow these transformers to turn out the lights on all these important creative businesses.”

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