November 2018 saw the completion of one of the largest deals within the TMT (Technology, Media and Telecommunications) sector take place. Comcast beat out Rupert Murdoch’s Fox in an auction for the majority ownership of the European media group, Sky Plc [1]. A winning bid of £17.28 per share meant that Comcast were able to acquire the group, but what was it about Sky Limited that made them such a coveted prize?
Background Sky
Sky Limited is a European media and telecommunications company headquartered in London. With operations in several European countries; Sky is Europe’s biggest and leading media company. Hot property for anyone that is looking to gain traction and market capitalisation (a larger piece) of the European market [2]. With over 23 million paying TV subscribers, as well as a thriving broadband business; it allows for an acquiring company to compete with the likes of on-demand subscription platforms. The explosive growth of Netflix, as well as Amazon’s Prime establishing a US audience of 26 million customers, has meant that media companies are having to act quickly. Fortunately, Sky has won the rights to UK Premier League Packages, as well as licenses to Game of Thrones which have been two very essential pieces in establishing their current customer base.
Background FOX
Twenty-First Century Fox, unfortunately, weren’t able to acquire Sky in the end; however, they did play a part in impacting the final deal. I also think that their reasons for wanting to acquire Sky are a little different to that of Comcast’s, thus think it is worth mentioning. This multinational mass media corporation was founded by Rupert Murdoch in 1979[18]. They were recently bought by Walt Disney for $71.3 billion in July of 2018, with the deal set to finalise and close by March 2019. Rupert Murdoch had first shown interest by putting in a bid in 2011, however, withdrew this due to the phone-hacking scandal[19]. As the media landscape continued to change in the upcoming years, Murdoch showed interest once again and commenced the bidding war. As we see the rise of social media and online news outlets, as well as the decline of newspaper sales, Murdoch wanted to mitigate the impacts of these factors by taking over the European media sector with this acquisition. Perhaps he also wanted to create a platform to potentially influence public and political opinion, but that we can’t be sure of. Never the less, it will be very interesting to see where they go from here.
Background Comcast
With having to act quickly in mind, Comcast has been incredibly busy in the past two decades. Comcast Corporation itself is a telecommunications company that headquarters in Philadelphia, Pennsylvania. It is the second-largest broadcasting and cable television company in the world by revenue with an illustrious history [3]. Founded in 1963 by the late Ralph Roberts as a small cable television operator with 5 channels and 12,000 customers. They have come a long way since their IPO (Initial Public Offering) in 1972 [4].
An IPO is used by companies in order to raise capital (money) by offering a part of their company (a share) to the public for the first time. Investors (those that buy the shares) receive financial benefits, such as if the company value increases so too does their investment value [6]. Some shares offer dividends, this means that those that own the shares (shareholders) receive a share of the company’s profits. To put Comcast’s growth into perspective if you invested $1000 in Comcast shares during this IPO, the investment would be worth close to $1.06 million today [5]. The growth that they have gone through has been rapid and this could largely be put down to their transactions in recent years. After 3 major acquisitions: AT&T Broadband in 2002, NBCUniversal in 2011 and DreamWorks Animation in 2016; we can now turn our attention to the acquisition of Sky in 2018 [4].
The deal that took place
After an intense bidding war between Comcast and Fox which started on the 25th of April 2018. Comcast putting in a counteroffer of £12.50 a share (approximately valuating Sky Limited at £22.1 billion), in comparison to a £10.75 a share (approx. £11.7 billion) offer made by Fox in December 2016. The two went back and forth, until September 20th 2018 where the ‘Panel on Takeovers and Mergers’ (they ensure that all shareholders are treated equally during a takeover bid) ordered for a blind auction to take place. Eventually, Comcast’s bid of £17.28 a share (£30 billion) beating out Fox’s bid of £15.67 to acquire 75% of shares of the European media group [1][6].
How Comcast funded the takeover
Unfortunately for Comcast, they weren’t just able to pluck £30 billion straight out of thin air, nor did they have £30 billion in cash to give to the shareholders of Sky. So how exactly did they manage to fund this deal? It took what is known as a corporate bond sale and was one of the largest in history (worth $27 billion) [11]. A corporate bond sale can be broken down: the bond aspect, this is essentially a loan and the person that buys into a bond is paid a rate of interest. A company issues the bond in order to finance operations, M&A or expand the business [12]. The bond is backed up by the ability of the company to meet their financial obligations.
Corporate bonds tend to be a lot riskier than that of government bonds because government backings are a lot safer than that of a company [13]. This means that the interest paid on a corporate bond is higher compared to interest paid on that of a government bond. The Comcast bond in order to fund this deal yields 1.75% above that of the treasuries interest rate in the given year [14]. Treasury rate plus 1.75% will be the rate of return depending on what the investor initially invested into the bond.
Synergies of the deal
Comcast wouldn’t have gone through this transaction if it wasn’t for what is known as Synergies. This is a concept whereby the value of the two companies that are brought together during an acquisition is higher than that of the two companies separately [17]. If there aren’t synergies involved within a deal, then there isn’t much point in companies merging or acquiring one another (they may as well remain two separate companies), because there would be no incentive for the acquiring company. There are two main synergies that arise from this transaction. Firstly, as both companies are very similar and within the same industry, they are able to use shared information technology and thus improve supply chain efficiencies [16]. Comcast now has the data of Europe’s largest media group, as well as the data of over 23 million consumers. They can use this information to allocate resources more efficiently and look out for inefficiencies within Sky’s operations (or their own). This is essential in helping to reduce costs, thus increasing profits.
Improved sales and marketing are another main synergy [16]. Instead of Comcast having to come into the European market and essentially starting from scratch, they have acquired a very established brand. They already have a vast number of subscribers, loyal customer and users. Even with this acquisition, the consumers may benefit from the value-added by NBCUniversal (owned by Comcast) and be more inclined to stay with Sky post-acquisition. Currently, Sky pushes the exclusive features their platform offers using several marketing tools and in no doubt will continue to do so. It is their on-demand platform (NowTV) that Comcast can really push to the US audience as they do not currently offer this service. As a result, this is a large revenue stream that can tap into which wouldn’t be possible without the acquisition.
Type of deal
This deal was an example of a horizontal acquisition. This is when a company acquires another company that is in the same industry and at the same process in the production process [8]. This is in comparison to vertical or conglomerate integration. Vertical integration occurs when a company is acquired within the same industry, but a different stage of the production process. A conglomerate is when an acquisition is made of a company that is in a completely different industry to the acquiring company [8]. In fact, all of the acquisitions that Comcast have gone through have been examples of horizontal. This arises the question that should they diversify their brand more than they have?
Who worked on this deal
The sheer number of advisors on this deal intrigues me. With so many firms having to work together (bulge brackets to boutiques) and under immense pressure, this really showed in the advisor fees they were able to receive. Wells Fargo and Bank of America Merrill Lynch worked on the financial package to pay for the deal (corporate bond sale). Whereas, Evercore Partners and Robey Warshaw worked on the advisory services for Comcast. In comparison, Sky’s financial advisors included Morgan Stanley, PJT Partners and Barclays. Data was released showing that Comcast’s advisors alone were set to receive £243 million. A small price to pay in comparison to the size of the deal. [20]
My viewpoint
Looking at the deal as a whole, this was a very good acquisition by Comcast. Sky is a well-established brand within the European market and this is where Comcast are yet to capitalise. The potential for increased revenue is certainly there too, however, I think that the first problem arises with whether the cost of the transaction will outweigh these benefits and synergies I talked about earlier. The price that Comcast paid is much higher than that of the value via market capitalization of Sky. Using market capitalisation, we see that actually the value of Sky Limited was £18.75bn compared to the £30.6bn Comcast paid. The question now arises if this transaction will burden Comcast. Both companies are operating in substantially large profits, with Sky: £691 million and Comcast: $22.714 billion, as a result Comcast should be able to absorb the shock if all doesn’t go to plan (which it shouldn’t).
The second implication is, will cable television still have a large following in years to come? The growth of on-demand television can’t be ignored [15]. As a result, will there be a large inclination of cable-television users in the next few years. If this were to be the case, then surely, we see Comcast declining quite rapidly. Perhaps now they should make use of conglomerate M&A, in order to diversify where their income is coming from. Acquiring companies outside TMT will mean they can mitigate their losses if this sector declines and the company they acquire sector grows. Now only time will tell, but Comcast are certainly on their way to world domination.
[1] https://www.bbc.co.uk/news/business-45615441
[2] https://en.wikipedia.org/wiki/Sky_Limited
[3] https://en.wikipedia.org/wiki/Comcast
[4] https://corporate.comcast.com/company/history?decade=2000s&slide=6
[5] https://www.investopedia.com/articles/markets/020216/if-you-had-invested-right-after-comcasts-ipo-cmcsa.asp
[6] https://www.investopedia.com/terms/i/ipo.asp
[7] https://en.wikipedia.org/wiki/Panel_on_Takeovers_and_Mergers
[8] https://www.investopedia.com/terms/h/horizontalintegration.asp
[9] https://www.bbc.co.uk/news/entertainment-arts-45634303
[10] https://www.ft.com/content/b402969a-cbd5-11e8-b276-b9069bde0956
[11] http://dictionary.sensagent.com/Bond%20(finance)/en-en/
[12] https://www.ft.com/content/f55c1c6a-c65d-11e8-ba8f-ee390057b8c9
[13] https://www.investopedia.com/terms/c/corporatebond.asp
[14] https://www.bloomberg.com/news/articles/2018-10-02/comcast-kicks-off-bond-sale-to-fund-39-billion-sky-acquisition
[15] https://www.bbc.co.uk/news/business-44817930
[16] https://corporatefinanceinstitute.com/resources/knowledge/valuation/types-of-synergies/
[17] https://www.tutor2u.net/business/reference/synergy
[18]https://en.wikipedia.org/wiki/21st_Century_Fox
[19]https://www.theguardian.com/media/2017/jun/29/all-you-need-to-know-21st-century-fox-sky-takeover-deal
[20]https://www.ft.com/content/0cdfe2a0-86ac-11e8-96dd-fa565ec55929
Hello I am Rohan, I currently study Economics and Stats at UCL.
