Comcast’s Weakness in Its Hunt for Fox Assets: Big Debt

Analysts say they’re concerned that Comcast chairman and CEO Brian Roberts might be too willing to take on a pile of debt to beat his rival Disney as the companies gear up for what’s likely to be a ferocious battle to gain ownership of large parts of 21st Century Fox.

Debate about the potential debt was re-ignited May 23 when the cable giant — after being rejected in its attempt to buy the Murdoch family-led company in late 2017 — said it was preparing an all-cash bid for the parts of Fox that Disney had agreed to buy in December in a $52.4 billion all-stock deal. Those assets include the 20th Century Fox studio, Fox’s entertainment cable networks and its international assets, including its stake in Sky.

Since April, when news of Comcast’s interest surfaced, its stock has plunged 8 percent. The drop is more than 20 percent this year, to $31.63 on May 24, near its 52-week low. Comcast’s debt could rise “from just under $65 billion to a staggering $164 billion,” says Moody’s analyst Neil Begley, who is considering a debt-ratings downgrade since the deal would be a “departure from conservative financial policy.” Excluding financial and government-related companies, that debt would be second only to the combined AT&T-Time Warner, he says.

“Increased leverage would be a change in the investment thesis for many [investors],” adds Macquarie Capital analyst Amy Yong, who says a Fox deal could end up “tarnishing Comcast’s pristine balance sheet.”

But she also said that while capital returns for shareholders, such as stock buybacks, could be limited, “we believe it could quickly get on a path to delever given clear synergies” in case the company seals a Fox deal.

Comcast is expected to make a final call after a judge rules in the antitrust lawsuit the Justice Department has filed to block AT&T’s Time Warner acquisition. That ruling is due before June 12. If AT&T wins, Comcast will likely feel emboldened in its Fox hunt; if it loses, some of the sizzle might go out of the race.

Philadelphia-based Comcast would first have to convince Fox’s board — which includes Rupert, Lachlan and James Murdoch — to drop its support for Disney. The Murdochs control Fox via their voting shares (even though they can only vote the 17 percent economic stake they hold in a shareholder vote on a sale), and their goal, at least in part, has been to join Disney’s largest shareholders. To sweeten its deal, Comcast’s offer probably will be high enough to cover a $1.525 billion termination fee that Fox would have to pay Disney — though that’s a lot less than the $2.5 billion Disney would have to fork over to Fox should regulators block the deal.

Per its deal with Disney, Fox has to disclose any superior bid and give Disney at least five business days to increase its offer. But few expect chairman and CEO Bob Iger to be thrown off the scent easily. With deep pockets, “Disney is in a strong position to compete with a higher bid from Comcast,” says MoffettNathanson analyst Michael Nathanson.

What’s been bad news for Comcast has been good news for Fox; its stock has soared, trading near its 52-week high, close to $40.

“On its own, we would value Fox in the low-$30 [billion]s,” says Sanford C. Bernstein analyst Todd Juenger. “Clearly the market [sees] a high probability of a bidding war.”

This story first appeared in the May 2 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.

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