What the Disney Deal Means for Fox's Sky Bid
Wall Street weighs in on what is next for the planned transaction for full control of the European pay TV giant.
Now that Disney has made it official that it plans to acquire large parts of 21st Century Fox, including its 39 percent stake in European pay TV giant Sky and many of its other international businesses, what happens to Sky and Fox's bid to take full control of it?
In short: Nothing much changes for now.
In December 2016, Fox offered a $15 billion deal for the remaining 61 percent stake, which U.K. regulators are still reviewing, with an initial decision planned for mid-January 2018 and final word by early March.
On Thursday, in unveiling the Disney deal, Fox emphasized that it would continue working towards closing the transaction. "Today’s announcement does not alter 21CF’s full commitment and obligation to conclude our proposed transaction to acquire the balance of Sky that we do not already own. Pursuant to the U.K. Takeover Rules, 21CF is required to proceed with the offer made under section 2.7 of the Takeover Code," it said. "We remain confident that the CMA and the Secretary of State for Digital, Culture, Media and Sport will approve the transaction on its merits, according to the statutory timeline and we continue to expect the transaction will close by June 30, 2018."
Fox added: "We remain of the firm belief that full ownership of Sky will unlock even greater growth and enhance its future competitiveness in a global marketplace, in which Sky is competing against new digital only entrants and some of the largest companies in the world."
Disney similarly emphasized that it was looking forward to owning Sky once its deal for Fox closes. "Assuming 21st Century Fox completes its acquisition of Sky prior to closing of the transaction, The Walt Disney Company would assume full ownership of Sky, including the assumption of its outstanding debt, upon closing," it said.
But, on a conference call Thursday, Disney CFO Christine McCarthy also emphasized that its deal for Fox was not contingent on the latter's closing of the deal for full ownership of Sky.
Disney also highlighted the appeal of Sky and other foreign assets it is buying in the deal, saying its international reach "would greatly expand through the addition of Sky, which serves nearly 23 million households in the U.K., Ireland, Germany, Austria and Italy; Fox Networks International, with more than 350 channels in 170 countries; and Star India, which operates 69 channels reaching 720 million viewers a month across India and more than 100 other countries."
With the U.K. regulators' decision on the Fox-Sky deal expected by early March, most industry watchers said it will come well ahead of the Disney-Fox deal close, which is expected to take 12 to 18 months. A couple of analysts therefore said that the option of Fox working to complete the transaction with a pre-agreed deal to sell all of Sky to Disney made sense.
The main question will now be what happens in the instance Fox's Sky deal gets blocked. Analysts contacted by The Hollywood Reporter said Disney would then have to decide whether to offer to buy up the remaining 61 percent Sky stake once its Fox acquisition closes. Fox executive co-chairman Rupert Murdoch said on a call Thursday that either way, at least Fox's 39 percent stake in Sky will go to Disney. If Fox's deal for the remaining stake doesn't go through, "it will be up to [Disney to decide] what to do," he said.
Liberum Capital analyst Ian Whittaker and other observers argued that, given U.K. political opposition to the Murdoch family, which currently owns the largest stake in Fox, a Disney bid for full ownership of Sky would likely be seen more positively in Britain.
"Disney is better positioned than Fox to purchase 100 percent of Sky," Telsey Advisory Group analyst Tom Eagan said in a Tuesday report. "We expect U.K. regulators would more easily approve of Disney's ownership." He added that "this gives Disney leverage in the purchase price: there's no reason Disney should pay a premium over the 10.75 pounds ($14.34) per share that Fox has offered."
B. Riley FBR analyst Barton Crockett echoed that sentiment in a recent note, writing: "We suppose Disney could face less regulatory scrutiny for the Sky acquisition than Fox."
"The investigation process will continue unchanged," said a representative for Britain's Competition and Markets Authority about the Disney deal's impact on the Fox-Sky deal review. A representative for the culture secretary similarly commented: "While 21st Century Fox's existing plans to acquire Sky remain in place, we expect the current investigation to continue."
The reps didn't speak to a possible review of the Disney deal for Sky as part of the Fox transaction, which could be decided on at a later stage.
"I doubt very much this [Disney deal] would interfere with the [U.K. regulatory review] process, which after all concludes in early March 2018," Alice Enders, head of research at Enders Analysis, recently told THR.
Credit Suisse analysts last month suggested, though, that not all Disney shareholders may want to own a pay TV distributor abroad. While many have argued that Disney can use Sky's technology and expertise as part of its international streaming video strategy, "it is not clear whether the main Disney shareholders will agree and give their support to management on this point,” they wrote.