Will Comcast's Planned $31 Billion Offer Lead to a Bidding War for Sky?

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"The market is predicting a much higher offer," notes one analyst, while another predicts "it is likely Fox will now walk away."

Will Comcast's planned $31 billion takeover offer for European pay TV powerhouse Sky trigger a bidding war with 21st Century Fox or Walt Disney?

Wall Street hotly debated that issue on Tuesday following Comcast's unveiling of its unsolicited bid for Sky, in which Fox owns a 39 percent stake and offered to take full control in December 2016 in a deal that U.K. regulators have continued to review. 

Sky's stock reaction on Tuesday suggested that investors were looking for a higher counter bid from Fox or some other party. As of 3 p.m. London time, 10 a.m. New York time, the stock was trading up more than 20 percent at 13.35 pounds ($18.54), 6.7 percent above the 12.50 pounds offer from Comcast. Meanwhile, the stocks of Comcast, Fox and Disney were down in early U.S. trading.

"Markets are currently anticipating a counterbid, with Sky shares trading above Comcast's offer price," RBC Capital Markets analyst Jonathan Atkin noted in a report. 

"It's an attractive 16 percent premium being offered over the Fox offer of 10.75 pounds, but it will not be enough," Cenkos analyst Alex DeGroote told The Hollywood Reporter about Comcast's planned Sky bid. "The market is predicting a much higher offer."

With Disney in December having agreed to buy Fox for $52.4 billion, including its stake in Sky, analysts were debating if Disney itself would get involved. "Disney will probably make a bid of its own for Sky, I think," DeGroote said.

In a statement, Fox said Tuesday: "21st Century Fox remains committed to its recommended cash offer for Sky announced on 15th December 2016. We note that no firm offer has been made by Comcast at this point." Sky made a similar comment.

Neither Sky nor Fox signaled what they would do if Comcast made a firm offer.

On a conference call with analysts about the planned Sky bid, Comcast CFO Michael Cavanagh wouldn't predict their next steps either. "We can’t predict what other folks are going to do," he said. "Our proposal is what it is." He added that Comcast would "react accordingly as time passes."

Liberum Capital analyst Ian Whittaker was among those observers who don't expect a counter bid, given Comcast's strong premium and other factors.

"There is the obvious question of whether Fox would want to counterbid. After all, it is selling its Sky stake to Disney, [which] suggests already it wants to exit at the right price," he said in a report. "If Fox did want to raise its bid, it would presumably need approval from Disney to do this or, if Disney refused, have to fund the extra price by itself, which means it is then looking at a loss if Disney did end up acquiring 100 percent of Sky."

Whittaker's conclusion: "We think the simplest — and best — thing for Fox to do is accept the bid, and it is likely Fox will now walk away."

RBC Capital Markets analyst Steven Cahall echoed that sentiment in a note to investors. "Recall that Fox always considered its 39 percent stake unnatural, and we think its bid for 100 percent was more financial than strategic, [meaning] it cleaned up the minority investment whilst taking advantage of Sky’s then beat-up share price, a weak British pound and inexpensive debt," he highlighted. 

"Outbidding Comcast means the deal is no longer financially opportunistic, and while we don’t profess to know the minds of the Murdochs on this, we’re inclined to say Fox may let Comcast go ahead, all else being equal," continued Cahall. "We don’t think Fox shareholders would at all be opposed, and importantly there’s no impact to [earnings] since Sky falls in investee income."

But the analyst added that "where things get even trickier is what Disney may want out of all this." Explained Cahall: "We’re going to be honest that we don’t know management’s mind here either as we were surprised the original deal for Fox included the Sky stake."

He added: "Our experience with investors is that they’re lukewarm at best to Disney owning Sky as they like Disney as a content company, not a distributor, and there’s a modest concern that running a business like Sky isn’t in Disney's DNA. We think that story is unchanged, and arguably cleaner, without Sky."

Cahall also suggested: "Disney and Comcast are potentially already facing a complicated relationship with Hulu assuming Disney has control with 60 percent post-Fox. We wouldn’t be surprised to see Disney remaining on the sidelines with Sky as a sort of quid pro quo for taking Hulu in the directions it sees fit without obstruction from Comcast. Palace intrigue indeed!"