The Tortuous Path to Winning TimeWarner, Sky and Fox

Walt Disney Co., Comcast, and Rupert Murdoch’s Fox organization are vying to gain control of Sky Plc, a high value satellite broadcast and production asset based in Europe.  Sky is a leader in pay-TV services in the UK, and regional markets including Germany and Italy. Sky also sells broadband and mobile phone services, and it would be an attractive acquisition for US media companies seeking to expand their international assets to offset challenges from Amazon, Google and Amazon.

Murdoch already owns 39% of Sky and was seeking regulatory permission to buy the rest, but regulators signaled that a third-party acquisition by other than Murdoch would be suitable.  Regulators said that a $29 billion bid for Sky from a third-party would be allowed to proceed.

The regulators would exclude Murdoch from buying the rest of Sky, but they leave Comcast and Disney in the bidding to take control of most of 21st Century Fox’s assets, including the 39% if Sky it already owns. Disney offered $52.4 billion for most of Fox’s production and broadcast assets, including its stake in Sky, Comcast is expected to top Disney’s current offer by 15% — a bid in the $60 billion range, including provisions for a regulatory breakup fee.

Public bidding is unlikely to continue until a clear verdict is reached in the Department of Justice’s (DoJ) lawsuit over the AT&T-Time Warner merger.  Both Disney and Comcast already hold huge broadcast and production assets and their scale, when augmented by Fox, could trigger DoJ action on antitrust grounds.

Comcast has endured seven years of DoJ oversight and constraints imposed under the Comcast-NBCUniversal decision.  Some at DoJ want to extend that oversight.  If the oversight lingers, similar antitrust provisions maybe imposed on a Comcast-Fox combo, or the acquirer may be forced to shed some of the assets.  If the DoJ includes destructive provisions like those, the regulatory package that it “approves” may be too onerous for Disney, Fox or Comcast to accept.

Still, the upside of pursuing the Fox assets is alluring and perhaps worth the risks.  Any successful bid that avoids harsh divestitures and draconian oversight would deliver attractive networks such as FX, Nat Geo, Fox’s regional sports, and Sky News. The 20th Century Fox properties would augment Comcast’s or Disney’s pipeline for fresh content suitable any streaming venture.  The 20th Century studios could also grind out attractive series to slow the exodus from Comcast’s cable subscriber base.

The companies involved in the M&A proposals post annual revenues (in billions) of $376, split as follows: AT&T $161, Comcast $85, Disney $55, TimeWarner $31, Fox 20th Century $29, and Sky Plc $16.   Currently the companies’ revenues represent the following shares of that market definition: 43%, 22%, 15%, 8%, 8% and 4%, respectively.

The DoJ will need to carefully establish a market definition and will need to groom the revenue numbers in order to arrive at a fair view of the market.  For example, despite its $161 billion in revenue, AT&T posted only $11.6 billion from its entertainment group (DirecTV, and U-verse).  Most of AT&T’s revenues come from business and consumer telecom and mobile wireless.  If non-entertainment revenues are excluded, AT&T’s market share would drop to about 5%.

Likewise, Comcast’s business revenues should probably be excluded when establishing the “market.”  Otherwise, adjustments might be the inclusion of Viacom and Lions Gate (total revenues of $13.3 billion and $3 billion) and other small players.

The definition of marketplace (what to include and what to exclude) is a chronic problem for antitrust analysts.  A tendency to skew the market scope either larger or smaller reflects the analysts’ biases.  It might be tempting for analysts to include the streaming group of Facebook, Google, Amazon, Netflix into the current M&A analyses.  On the other hand, it seems unfair to burden an acquirer with the consequences of what another unannounced M&A proposal might do to the future marketplace.

Surely any DoJ decisions on the fate of TimeWarner and Fox will trigger some acquisitions by the streaming group as they bulk up to do battle with each other and with AT&T, Comcast and Disney. The streaming group is likely to be a major opponent to Disney and Comcast during regulatory proceedings that lead to a DoJ decision on the fate of Fox.

Approval of the AT&T-Time Warner merger would improve the odds for approving a Disney-Fox acquisition, because a Disney-Fox pairing results in three large players — ATT, Comcast and Disney – whereas the approval of a Comcast-Fox deal would leave just two major players – namely, ATT and Comcast.

If the DoJ approves a Comcast or Disney deal with Fox, or approves an AT$T-Time Warner deal, a political backlash may play out during the months leading to mid-term elections.  Unless global trade frictions settle down, the EU may make the Sky component a difficult piece to integrate any win of the Fox assets.  Regulators face some challenging analysis and the acquisitive media properties face massive litigation costs.

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