The Justice Department on Wednesday gave the regulatory greenlight to Disney’s $71.3 billion deal to buy the lion’s share of Rupert Murdoch’s film and TV empire after Disney agreed to divest Fox’s 22 regional sports networks as a condition of securing anti-trust clearance.
The sign-off from the DOJ is significant in the view of 21st Century Fox’s board members because concerns about Comcast’s ability to secure regulatory approval for its proposed $65 billion transaction have been the overriding consideration for the Fox board. After failing to secure a deal with Fox last fall, Comcast on June 13 fielded a $65 billion bid, besting the economic value of Disney’s initial agreement with Fox, unveiled Dec. 14 and valued at $52.4 billion.
But the Justice Department’s move on Wednesday strengthens Disney’s hand.
“The pressure is now back on Comcast to come in with a more significant bid above Disney’s $38 per share offer to help sway the 21st Century Fox Board to reject the bird in the hand regulatory clearance,” MoffettNathanson Research analyst Michael Nathanson wrote on Wednesday. Comcast declined to comment for this story.
In a Securities and Exchange Commission filing made late Monday, Disney and Fox offered behind-the-scenes details of the high-stakes maneuvering to respond to Comcast’s offer and the Fox board’s deliberations and consultations with advisers on the merits of the competing bids. Disney has the upper hand in this process as it has a right to match any rival offer for Fox.
Fox board members repeatedly raised concerns about a Comcast deal getting bogged down in a long regulatory review and a fight over divestitures or other conditions. From that perspective, the sweetened $71.3 billion cash-and-stock offer that Disney unveiled June 20 looks even better in light of Wednesday’s announcement from the Justice Department.
“21CF management noted that Disney’s (June 20) proposal, as compared to Comcast’s, provided for higher nominal value, enhanced opportunity for value appreciation through its stock component, certainty of value through its collar mechanism, the opportunity for stockholders to elect cash or stock consideration, as well as certain enhancements to the existing merger agreement’s allocation of regulatory risk,” the SEC filing stated.
“Comcast’s proposed contractual allocation of regulatory risk, which merely matched the regulatory efforts and reverse termination fee provisions in the original combination merger agreement and did not offer enhanced protections to address the higher regulatory risk posed by a transaction with Comcast,” it went on. The board also decided that a “transaction with Comcast presented unique regulatory uncertainties and (Comcast’s) proposal did not sufficiently limit regulatory uncertainty associated with a potential strategic transaction with 21CF.”
The Fox board raised concerns that Comcast’s June 13 offer only agreed to match the regulatory protections included in Disney’s initial agreement with Fox rather than offering even greater protections. Those provisions include a $2.5 billion breakup fee payable to Fox by Disney if the deal were blocked by regulators — a point that has now become moot for Disney. Comcast offered to cover the $1.52 billion fee that Fox would be obligated to pay Disney if it were to back out of the pact that was reaffirmed by the Fox board at the higher price on June 20. But the Fox board noted that with Comcast’s June 13 bid topping Disney’s initial offer, the value of the $2.5 billion breakup fee has fallen to 2.2% of the equity value of the deal, compared to 2.9% under Disney’s initial $52.4 billion bid.
Comcast has been aggressive in articulating its view that there should not be many regulatory red flags given the nature of the assets under consideration and the fact that its cable systems business is regional, not national. But the cable giant’s recent track record in Washington — where opposition and concern about Comcast’s share of the broadband market tanked its planned buyout of Time Warner Cable in 2015 — has clearly spooked Fox’s board members.
Moreover, the Fox assets on the table include Fox’s 30% stake in Hulu. Comcast, through its acquisition of NBCUniversal in 2011, was forced by the Justice Department to take a passive role in the management of Hulu for seven years out of concern that Comcast might try to steer Hulu away from competing with its core cable systems business. A deal that would give Comcast majority control of Hulu could be a hurdle for anti-trust regulators “given that the DOJ placed conditions on Comcast’s ownership of even a minority position in Hulu, LLC in the now-expiring 2011 consent decree,” according to the SEC filing.
Comcast is banking on the fact that Fox’s board has a fiduciary duty to consider higher offers despite the board’s unanimous endorsement of the latest Disney bid. But there are also mounting questions about Comcast’s ability to finance an even heftier offer that would top Disney’s latest proposal.
The Wall Street Journal reported Wednesday that Comcast may look to bring in partners if the bidding were to reach as high as $90 billion. In that scenario, Comcast might take Fox’s international assets while a partner would focus on the 20th Century Fox studio, FX Networks, and other U.S.-centric businesses, according to the Journal. To Fox shareholders, the prospect of carving up the company may well be less attractive than Disney absorbing businesses that have long been under the same roof.
Disney’s June 20 offer also includes a mix of cash-and-stock (compared to the all-stock structure of the Dec. 14 deal), and it offers Fox shareholders the ability to decide how much to receive in cash or stock. That’s also an attractive component to the Fox board, according to the SEC filing.
“The stock component of the merger consideration offers 21CF stockholders the opportunity to participate in the future growth and opportunities of the combined company, and the 21CF board’s positive view of the overall potential long-term stockholder value creation proposition to 21CF stockholders of a potential strategic transaction with Disney based on the complementary nature of (Fox’s assets) with Disney’s businesses and the relative attractiveness of Disney’s equity currency and the resulting equity of the combined company,” the filing stated.
Disney’s approach to the competition posed by Comcast has been to leverage its advantage in having already reached a preliminary agreement with the Fox board. In discussions held between the Disney and Fox camps between June 15 and June 19, Disney’s Kevin Mayer made it clear that “any leak or public disclosure of the potential proposal would result in no proposal being made by Disney.”
Mayer also told the Fox camp that if Fox’s board voted to endorse Comcast’s June 13 offer, Disney would withdraw its higher offer and rely on its matching right to get the deal done — a scenario that could be less lucrative for Fox shareholders.
The SEC filing also disclosed that Rupert Murdoch, 21st Century Fox executive chairman Lachlan Murdoch, and Fox board member Viet Dinh recused themselves from the Fox board’s vote on the June 20 Disney offer because they are destined for top roles at the New Fox entity that will house the remaining assets that are not part of the sale.
Meanwhile, Disney is now on the hook to line up buyers for Fox’s 22 regional sports networks as part of the DOJ agreement. New Fox is not expected to seek to retain them. The channels, which include New York’s Yes Network and Los Angeles’ Fox Sports West, are valued at around $19 billion, per MoffettNathanson Research. Speculation about potential buyers has ranged from John Malone’s Liberty Media group to cable operators such as Charter Communications and Altice USA to digital giants that are diving into video, namely Facebook and Amazon.