Disney vs. Comcast For Fox Assets: What Happens?

I am utterly fascinated and transfixed by the battle for 21st Century Fox assets taking place between Disney and Comcast. If you're interested in media, sports, and business you should be captivated by this story as well because there is so much drama in play and so many potential plot twists and pratfalls between now and when anything is officially decided.

If you haven't been paying attention much has transpired since it was announced in early January that Disney would be spending nearly $67 billion to buy the 20th Century Fox Movie and TV studio and its library of films and TV shows and the resulting characters — among them “The Simpsons,” “The X-Men,” “Avatar,” and the like — as well as the Fox Sports Regional Sports Networks, the FX and Nat Geo cable channels, Fox’s stake in the Hulu streaming service, and international media properties with 130 million existing subscribers.

Not too long after this deal was announced came an interesting story in the Wall Street Journal, that Comcast had bid 16% more than Disney for the assets, but that the Fox board had been concerned that purchase wouldn't pass antitrust muster. The moment I saw this article, I believed this was Rupert Murdoch attempting to get an ever better deal. Remember, Murdoch owns the Wall Street Journal. Do you really think that newspaper, of all newspapers, is going to break news about Murdoch's companies without his fingerprints on it?

So why didn't Fox take more money from Comcast at the start? Because AT&T's proposed purchase of Time Warner was challenged by the government on antitrust grounds. Since that time AT&T and the government have had a trial -- which most observers believe favored AT&T -- and the judge has announced he will issue a ruling on June 12th.

Presuming the merger is allowed then Fox's initial reluctance to partner up with Comcast would have to be re-examined.

But regardless of how that ruling goes the Sky Broadcasting Company, a British satellite company which Fox owned 39% of and was seeking to buy the other 61% of, has turned into a mini-acquisition battle as part of the larger tug of war between Disney and Comcast. The plan was for Disney to acquire Fox's stake in Sky, either in whole or part, when the acquisition of assets went through, but Comcast announced a higher bid than Fox for the Sky assets.

That was the first sign that Comcast was not prepared to let this asset purchase go quietly into the good night.

Then on Monday night came the latest news -- Comcast was seeking $60 billion in funding to purchase the Fox assets outright with cash, as opposed to the stock and cash deal proposed by Disney.

That officially put the Fox assets even more into public play.

So what happens from here and what's the end game? Let's break it all down.

1. Comcast (probably) leaked news that it was seeking financing on the day before Disney released its latest earnings report.

That sent Disney stock down -- over fears that Disney might have to pay too much -- and the stock has continued down today as a result of weakness in ESPN's business. That's important because, remember, Disney is paying for Fox, at least right now, primarily using its stock. The lower the stock price goes the less Disney is paying for the Fox assets.

When the Disney and Fox deal was announced, Disney stock stood at $111 a share and would subsequently go as high as $112 and change. It is now, at least as I'm writing this, beneath $100 a share, near a two year low. (Disney stock is down 20% over the past three years, during an absolutely red hot stock market. Most of that is predicated over fears relating to ESPN's collapsing business model.)

Wall Street has driven down Disney's stock price over fears that Disney, in order to acquire the Fox assets, might have to pay too much. This stock decline means that what has been announced as a $52.4 billion asset purchase is more like a $47 or $48 billion purchase right now.

At a minimum, it's probably likely that Disney is going to have to end up paying more cash and less stock to purchase the Fox assets it wants to buy. And it also seems clear that Comcast's strategy right now is to try and keep Disney's stock price down to make the value of Disney's stock purchase much lower than anticipated and require another offer to be made.

2. What about Comcast?

The stock market has not liked Comcast's attempted buying of Fox assets. In the weeks after the announcement of the Disney and Fox deal Comcast stock actually climbed to nearly $43, as traders expressed relief that Comcast wouldn't be encumbering itself with expensive Fox assets. But as news about Comcast's continued pursuit of Fox has circulated the stock has descended to just above $30, approaching a two year low.

If Comcast ends up paying over $60 billion for the Fox assets, Wall Street, at least based on the stock price, appears to believe that price will be too high. Significantly, there is also a fear that any asset purchase would require prolonged vetting and court challenges before it is complete. So it might take two years to wed these companies.

But, and this is significant, given the depressed Disney stock price, if Comcast is offering $60 billion in cash and Disney's offer is only worth $47 or $48 billion in stock, that's a substantial premium from Comcast. How could the Fox board resist the premium offered by Comcast?

3. What about Fox stock?

Stock in Fox hasn't changed much suggesting Wall Street doesn't anticipate a massive premium over where the stock trades now and had already priced in this Comcast purchase offer. But, and this is significant, Fox stock is just shy of an all time high, which was set back in 2014.

As Disney stock has dropped 10% Fox's stock price has stayed pretty much the same. That suggests Wall Street believes the dollar value on this deal isn't going to change that much before all is complete.

It's also worth nothing that James Murdoch, who had been rumored to be in line for a top job at Disney, is now reportedly going to start his own venture and not go to Disney. That suggests there may be even less interest in Fox staying committed to Disney than there was before.

4. Okay, what does all this tell us?

It tells me that the stock market is expecting Fox's assets to sell for just about what they are selling for now, but that Comcast or Disney will be forced to pay mostly cash in the event they buy these assets. In the short term the stock price of whichever company doesn't end up buying the Fox assets is likely to increase because Wall Street seems convinced Rupert Murdoch will be extracting the maximum purchase price.

Of course, the short term is notoriously unreliable when it comes to any individual stock price. It's only with the wisdom of multiple years that we could see whether the acquisition made sense or not. Each company likely has optimistic models justifying their purchase prices. Whether those models turn out to be accurate is anyone's guess.

5. Could Netflix, Apple, Google, Facebook or Amazon get involved in this asset sell?

Now that would really make things interesting and it could certainly happen.

All five of these companies have substantial money at play and could be interested in purchasing these Fox assets. But there may be a more intriguing play afoot here, if the merger goes through could Apple or Amazon, two companies starting to increase their own original content production, be interested in buying the remaining Fox assets, particularly the Los Angeles movie and studio lot?

 

After all, this new content from Amazon and Apple has to be produced somewhere. And where else in Los Angeles can you buy a movie and TV studio lot of this size?

It's possible that all of Fox could end up being bought before all is said and done.

In the meantime, stay tuned, this is a fascinating story to follow.