Comcast should shift its focus to buying Sky while Disney takes the rest of the 21st Century Fox assets that are the focus of a bidding war between the media giants. That’s the view expressed by Moody’s Investor Service in a report issued Friday about the debt ramifications of the escalating battle between Disney and Comcast.
Moody’s, the debt rating agency, sees a compromise approach to carving up Fox’s assets as the best outcome for the debt ratios of Disney and Comcast. Comcast and Disney have both fielded offers for the bulk of 21st Century Fox. Comcast separately has made a $31 billion offer to buy out all of Sky, the European satellite platform. Fox at present owns 39% of Sky, a stake that is included in Disney latest $71.3 billion deal for Fox.
“From a strategic standpoint, we believe a Disney-Fox marriage edges out a Comcast-Fox combination,” Moody’s analyst Neil Begley wrote in the report. “Disney’s ability to monetize intellectual property across all of its lines of business is second- to-none in the industry. A Comcast-Sky marriage makes strategic sense because both are pay-TV providers and Comcast is a cable distributor first, content company second.”
The Moody’s report suggests that Disney and Comcast could do some horse-trading of assets as part of the resolution of the bidding war that has been brewing since last fall. The Fox sale will also include Fox’s 30% interest in Hulu, the streaming platform which Disney and Comcast also hold 30% stakes — meaning that Disney or Comcast will wind up with a majority interest in Hulu if either of them prevail in acquiring Fox.
Moody’s suggests that Disney could trade the 39% stake in Sky that it will inherit from Fox for Comcast’s 30% stake in Hulu. The complexity of these ownership interests could provide the building blocks of an agreement.
“This could also provide an opportunity, however, as Disney and Comcast could agree on an asset swap in which Comcast receives the 39% equity in Sky from Disney and Disney receives the 30% equity in Hulu from Comcast, alleviating the governance issues that could arise with split ownership of these assets,” Moody’s wrote.
If Comcast were to acquire both Fox and Sky, it’s debt-to-earnings ratio would hit a high 4.4 multiple, Moody’s estimates. If Comcast buys only Sky, its debt load would be a more manageable 2.9 times earnings. If Disney were to buy both Fox and the remainder of Sky, its debt load would hit a 4 times earnings multiple, which is still on the high side. If Disney were to buy only Fox, the ratio would be 3.5 times earnings, according to Moody’s.
Although Sky and its reach in the U.K. and Europe is a big part of the attraction of the Fox deal for Disney and for Comcast, Moody’s observers that Disney is likely to face pressure to pay more for Sky now that Disney has raised its bid for all of Fox, including the 39% stake in Sky. By U.K. law, Disney will have to make an offer for the remainder of Sky if it succeeds in buying out Fox’s stake. To complicate matters further, Fox is also trying to close its long-pending deal to buy the remaining shares in Sky, although that has been complicated by the competing bid that Comcast put on the table in April.
Moody’s suggests that Disney would be wise to let Sky land with Comcast.
“We believe both Fox and Sky are transformative assets on a standalone basis that would better position both Disney and Comcast in the face of changing consumer behavior around consumption of content,” Moody’s wrote. “A scenario in which Disney were able to acquire Fox, and Comcast were able to acquire Sky would be the most desired outcome for bondholders of all companies and likely avoid one or the other becoming one of the world’s most indebted non-financial corporations. However, the desirability of most of the important Fox assets, as well as the lack of other comparable targets, means rational minds will need to triumph over emotion so that both companies’ equity holders and bondholders come out winners.”