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03 October 2018

Sky's the limit

James Andrews, Director - Head of Investment Management, looks at the real winners in the battle between Comcast and 21st Century Fox

So Comcast has won the race for Sky, lodging a £17.28-per-share bid in a rare Takeover Panel-controlled auction for the company versus Disney-backed 21st Century Fox.

The winning bid values Sky at £29.7bn in a deal that will change the global media market. On 26th September, following the defeat, Disney agreed to Fox’s decision to tender its 39% stake in Sky to Comcast.
On the face of it, this looks like a loss for Fox, and therefore Disney, which agreed to pay US$71bn for Fox at the end of July this year. Yet the value of Fox’s stake in Sky more than doubled from US$7bn on 8th December 2016, prior to its attempts to purchase the remainder of Sky that it didn’t already own, to US$15bn last week. This sees a significant offset in purchase cost for Disney. This, along with the estimated US$15bn that Disney will receive from selling off Fox’s regional sports networks, means that its original cost of the Fox bid nearly halves.

It has also been argued that Comcast is buying ‘old tech’, a cable subscription company at a time when it is seeing the pressure of cord cutting in its own market – the US - as consumers move to streaming services. Disney has already announced it will not only use the extra funds to pay down the debt utilised for the Fox acquisition, but also spend around US$10bn on content for its soon-to-be-launched streaming service. Not a bad pivot from one of the key creators of global media content, and one, that could be argued, has more of a future in the modern world of media consumption.

Being wedded to satellite dishes, cables, upfront installation fees and 12-month contracts seems positively archaic when considering the Netflix-type streaming arrangement, where a low monthly subscription delivers content via the internet and can be switched off at the end of the month and replaced with a new provider with no upfront costs. Disney may well breathe a sigh of relief when the dust settles on the global media landscape, as the distribution model changes by all recognition.

Content will arguably be king, and bringing home many Marvel characters previously outside Disney’s grasp could well be key. Fox has the rights to movies including X-Men, Fantastic Four, Deadpool, Silver Surfer and Doctor Doom among many others. When Disney announced in 2009 that it had reached an agreement to buy Marvel Entertainment and most of its associated comic assets for US$4bn, there were many sceptics. However, it turned out to be a masterstroke by CEO Bob Iger, giving Disney a conveyor belt of blockbusters year-in year-out that could then add to the merchandising and theme park juggernaut’s wider operations. The numbers are staggering. In the last 10 years, Marvel Studios has released 19 movies. Of these, only three grossed less than US$500m, and the current grand total for all Marvel releases is more than US$16bn.

While Comcast would have been forgiven for thinking themselves the winner in this battle, the war, as they say, is not over and it wouldn’t be surprising to see Disney emerge as the long-term victor once again in the world of global media titans.

Ends

Please note, investments and income arising from them can fall as well as rise in value and you may lose some or all of the amount you have invested. Past performance and forecasts are not a reliable indicator of future results or performance. Please note this article is for information only and not a recommendation to buy or sell the investments mentioned.

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Sky's the limit
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