Comcast submitted the winning bid in the Sept. 22 auction for Sky, with an offer 10% higher than 21st Century Fox’s. After the dust settled, Disney emerged looking like a winner as well, given that it’s poised to acquire Fox’s existing 39% stake in Sky through its $71.3 billion buyout of key Fox assets.
Comcast shares fell as much as 8.3% Monday, while Disney stock was up as much as 2.5%. [UPDATE: Comcast stock closed down 6% for the day, to $35.63 per share; Disney closed up 1.85%, to $112.77.]
Comcast “grossly overpaid” for Sky, and “we fear that Sky will be an albatross” for the cable and media giant, Wall Street analyst Craig Moffett wrote in a research note Monday, downgrading his rating on Comcast’s stock from “buy” to “neutral.”
Before Fox made a bid to buy out the rest of Sky in December 2016, the pan-European pay-TV giant’s stock was trading at less than eight times earnings before interest, tax, depreciation and amortization (EBITDA), per Moffett. Comcast is now paying 15 times Sky’s EBITDA.
Comcast has tried to make the case that Sky’s pay-TV service, with 23 million subscribers in the U.K., Ireland, Germany, Austria and Italy, is an important platform that will help it build a global streaming platform to compete with the likes of Netflix. “This acquisition will allow us to quickly, efficiently and meaningfully increase our customer base and expand internationally,” Roberts, Comcast’s chairman and CEO, said in announcing the company’s victorious bid.
The problem, according to Wall Street analysts, is that Sky does not really give Comcast a springboard into an over-the-top future. “Comcast’s Sky win helps to diversify the company and add to cash flows, but doesn’t solve the future dilemma it faces from companies like Netflix and from 5G wireless advances,” Neil Begley, Moody’s lead media analyst, commented.
As Moffett put it, Comcast “seems as though they would like investors to forget that it is also a satellite TV provider, and satellite video distribution is increasingly becoming obsolete.”
Comcast’s cash deal for Sky is expected to be funded primarily with new debt. That will yield a more highly leveraged balance sheet: Its debt-to-EBITDA ratio will be around 3.6X on a pro-forma basis for 2018, per Moody’s estimates. But Moody’s expects Comcast to be able to reduce that to below 2.75X within 18 to 24 months of the transaction’s expected close before the end of 2018.
Meanwhile, the operational synergies between Comcast and Sky will not be significant, said BTIG Research analyst Rich Greenfield. “Sky is already well-run and it is hard to see how Comcast will be able to dramatically increase earnings,” he wrote.
That said, Comcast and Sky together will have an unprecedented amount of leverage in programming deals, Greenfield opined. “Comcast’s massive global scale (44 million subscribers across the U.S. and Europe) should be a unique weapon whose value we do not yet know how to value,” the analyst wrote. “Consider how Netflix changed the game acquiring/licensing content globally; could we see Comcast similarly change the MVPD [multichannel video programming distributor] game by negotiating carriage deals globally?”
UBS analyst John Hodulik maintained a “buy” rating on Comcast in a research note Sunday. “Initial reaction to the Sky deal may weigh on CMCSA shares,” Hodulik wrote, “but we believe strong cable performance and cash generation, combined with clarity on the M&A front, should drive relief longer term.”