Rupert's Choice: Will Fox Bet Its Legacy on Comcast or Disney?

Comcast vs. Disney: Who Is the Best Fit With Fox-Illustration by Jamie Coe- SPLASH -2018
Illustration by Jamie Coe

Following the AT&T-Time Warner mega-deal, Comcast came out swinging, challenging Disney’s $52 billion bid for Fox assets with a $65 billion cash offer. Now, as the Magic Kingdom mulls how to counter, the fight could get ugly (and pricey): "Bob Iger would rather lose Mickey Mouse’s right arm than lose Fox to Comcast."

On Aug. 9, Bob Iger arrived at Rupert Murdoch's lush Moraga Winery in Bel Air. As they had from time to time in the past, the two moguls — friends despite their years of competition — sat down to talk shop, particularly how to adapt to the rapid changes in the media landscape. In the course of reflecting on the growing challenges, the pair — arguably the most powerful execs in global entertainment — began to entertain the unthinkable: a strategic transaction involving Iger's Walt Disney Co. and Murdoch's 21st Century Fox.

When Disney began to officially pitch Fox on a partial takeover in September, Iger, 67, had a clear strategy: convince Murdoch that the Magic Kingdom's assets would be a perfect fit with Fox. After all, Disney had, in May 2017, opened a Pandora — The World of Avatar attraction at one of its theme parks in Orlando, and the potential for a blockbuster superhero crossover between Fox's X-Men franchise and Disney's Marvel Universe essentially sold itself.

Roughly four months after that meeting, Disney announced it would acquire 21st Century Fox for $52.4 billion in stock.

However, just as fanboys the world over were beginning to salivate over the possibility of Deadpool teaming up with Iron Man, the U.S. government stepped in. Emboldened by a judge's ruling on June 12 that the Justice Department couldn't prevent AT&T from purchasing Time Warner for $85.4 billion, Comcast wasted little time in wading into the merger mania. A day after the ruling, Comcast topped Disney's bid by offering $65 billion for the same assets. But unlike Iger, Comcast didn't make its case based on content. Instead, Steve Burke, the CEO of Comcast's NBCUniversal entertainment arm, placed the emphasis squarely in a business context. "The revenue synergies are really the upside that has brought us to the table," he said during a June 13 call with analysts.

Comcast's bid certainly came as no surprise to industry observers, but the aggressiveness of chairman and CEO Brian Roberts right out of the gate was hard to miss. By emphasizing money and savings over content, Roberts was hoping to make Murdoch an offer he simply couldn't refuse. Now, with the clock ticking, a tricky regulatory landscape standing in the way and a long-simmering grudge between the leaders of Comcast and Disney providing added dramatic backstory, insiders say the fight could get ugly — and pricey. Sure enough, Disney countered on June 20 with a bid of about $71 billion, roughly $38 per share.

Following its initial bid, Comcast kept the pressure up. On June 14, the company sent a communique to Fox quoting seven lawyers, economists and university professors who had opined in the media that, should the two agree to a mega-deal, regulators would probably approve. The memo underscores how the war is shifting: Disney initially offered all stock to acquire most of Fox, so it has been busy convincing Murdoch of the synergies that would lead to rising Disney shares for himself and his investors. And Disney's counteroffer is up to 50 percent stock. Comcast, however, has offered all cash, so it has been pushing the narrative that regulators might be less likely to delay a partial merger of Comcast-Fox. Analysts expect Comcast to counter Disney's counter with about $41 per share — also in cash, so it will continue to woo Murdoch not with talk of synergies, but of a relatively painless regulatory process.

The Comcast strategy makes sense since 87-year-old Murdoch is anxious for closure on a deal for the film and TV studio, FX, Nat Geo, Fox's 30 percent stake in Hulu, its 39 percent share of U.K. pay TV giant Sky and other assets to be consummated quickly. What's left after a sale, for now dubbed New Fox, will consist of the Fox broadcast network, Fox News Channel, Fox Business Network, the two sports networks and a few more assets, all of which would generate about $10 billion in annual revenue, says Timothy Horan of Oppenheimer.

"If Rupert wants, or ends up with, equity, then synergies matter to him," notes Steven Birenberg, founder of Northlake Capital Management. If Comcast wins the day with cash, then not so much.

Roberts has clearly made the calculation that stressing swift regulatory approval — and money in his pocket — could have real appeal to the time-conscious Murdoch. Steven Cahall of RBC Capital Markets notes that Comcast might be trying to speed through the process with "an aggressive stance" since conventional wisdom suggested the conglomerate would have opened its bidding at $60 billion, $5 billion less than it did. Comcast also matched Disney's breakup fee of $2.5 billion and threw in another $1.5 billion to reimburse Fox for the money it would need to pay Disney should it renege on the original deal in order to accept one from Comcast instead.

"We believe our transaction is as — or more — likely to receive regulatory approval than Disney's transaction," Roberts said on the June 13 call, with CFO Michael Cavanagh adding that he expects Fox could wrap up the regulatory review on a deal and close it within 12 months. In another letter to the Fox board after it made its bid official, Comcast argued that its deal was more likely to receive regulatory approval because Fox and Disney each have a large presence internationally, while Comcast generates just 9 percent of its revenue overseas — and even with Fox it would grow to less than 30 percent.

"Comcast can make a good argument for the deal solely on the basis of diversification," says Birenberg, "gaining international scale and reducing the impact of the domestic cable business that investors hate even more than they hate the domestic networks business."

Comcast also is using some of Disney's synergies against it: The company has pointed out in memos that a Fox-Disney movie studio would command 50 percent of the domestic box office. Disney would enjoy the potential to dictate higher terms to theater owners, and regulators could balk at giving one company such a huge share of the market. Comcast also has indicated that Fox's regional sports networks are problematic for Disney because they represent a "complete overlap" with ESPN.

If Murdoch doesn't buy into Comcast's insistence on a painless regulatory process, the best move for Iger is to continue to emphasize content. Perhaps Disney's biggest case in the synergy department would be its Netflix-competing streaming service set to launch next year with Marvel, Lucasfilm, Pixar and Disney-branded content and, should it succeed in its bidding war with Comcast, lots more from Fox, like the Deadpool and Planet of the Apes franchises. Comcast, on the other hand, "has not made clear its direct-to-consumer strategy," says Birenberg.

"Disney might have a slight edge given a bit closer alignment of its operating philosophy as a pure content-oriented company [like Fox]," argues CFRA Research analyst Tuna Amobi.

All of this high-stakes gamesmanship is unfolding against the backdrop of high-profile bad blood between the two media giants. Roberts, 58, is certainly a keen competitor, and some say he may be particularly focused when it comes to Disney given that the Magic Kingdom is not only the largest content company in the world but also rebuffed a $54 billion offer to merge the two companies in 2004. Observers say that, even if Roberts doesn't wrest Fox from Iger, he could at least stick it to his rival by driving the price sky-high.

Fox was set to discuss Disney's initial offer and Comcast's counter at a board meeting June 20, according to sources. Now, the board has Disney's higher offer to consider.

If Comcast counters yet again, Fox will need to officially determine if Comcast's bid is superior and give Disney at least five business days to sweeten its deal. If Disney counters again, Comcast will have the opportunity to boost its offer and so on, with all offers after the initial one required to be made within three business days until one suitor throws in the towel.

Jefferies analyst John Janedis figures the bidding could go as high as "nearly" $80 billion, which would represent a stone-cold coup for Murdoch, given the entire company was worth just $44 billion less than two years ago.

Some believe that a compromise could still be reached — assuming Murdoch and sons James and Lachlan are open to the idea. Comcast, for example, wants all of Sky and has bid roughly $30 billion for it in a separate deal — further irritating Iger. Nevertheless, Disney could leave Sky to Comcast and ride into the sunset with the other Fox assets.

Still, the real prize, according to some analysts, is all the Fox assets that come with about $19 billion in annual revenue and more than $3 billion in earnings.

So as the industry waits for Disney's next move, one thing is clear: The fight is just getting started, and neither side is going to back down anytime soon.

Says Reputation Management Consultants chairman Eric Schiffer, "Iger would rather lose Mickey Mouse's right arm than lose Fox to Comcast."

What Disney, Comcast and Fox are keen to avoid is getting as swept up in merger mania as the former Time Warner was when it allowed itself to be acquired by AOL 18 years ago, a mega-deal that led to a historic $100 billion write-down and severely tarnished the business reputations of all involved.

The bidding war for Fox "is all short-term, knee-jerk scrambling, because historically deals of this type and size tend to be made near the end of good growth periods and near market tops,” warns Hal Vogel, CEO of Vogel Capital Management and a former entertainment analyst. “Sometimes, as with AOL Time Warner in 2000, this actually defines the top as the winning bidder tends to overpay.”

This story first appeared in the June 20 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.