Comcast Hasn’t Out-Foxed Disney Yet

(Bloomberg Opinion) -- How good is Comcast Corp.'s bid for 21st Century Fox Inc.? Nothing Walt Disney Co. can't handle. 

Now that AT&T Inc. has been cleared to buy Time Warner Inc., Comcast and Disney have each been emboldened to do their own momentous transaction. The problem is they want the same one. With Time Warner off the block, the Murdochs just so happen to have the last big bundle of TV and film assets for the taking.

After the close of trading Wednesday, Comcast kicked off round one of a potential bidding war, offering $35 a share in cash for the set of assets Fox's board had already planned to sell to Disney. Quick refresher: A deal with either party would involve the buyer taking on Fox's cable networks, international stakes, regional sports networks and film studio, while the Fox News and national sports networks—the Murdochs' crown jewels—would get spun off and remain under the family's control.

The $35-a-share bid equates to $65 billion in total (not counting any assumed debt) and compares with Disney's $52.4 billion offer. But Comcast's cash offer is only worth that much today if you are confident that the judge's ruling in the AT&T case on Tuesday applies to Comcast. More on that later, but for now, let's say a deal with Comcast takes a year to close, which would still be relatively quick considering the size of the transaction. Some back-of-the-envelope math shows that the bid is really worth $31 and change, using a Bloomberg-calculated required return for Fox shares.  

Disney's offer (so far) involves only stock, and analysts see its share price climbing more than 10 percent over the next year. If they're right, and using the same discount as in Comcast scenario, Disney's offer is currently worth $30 and change. So while Comcast's press release proclaims that it's offering a 19 percent premium over what its rival has offered, really it's kind of splitting hairs.

The caveats here are that Disney's stock could very well fall or stay flat over the next year. It certainly hasn't been the rock star lately that it's been in the past. But the fact that Rupert Murdoch, while sort of heading for the exit, still wanted to maintain a stake in Disney tells me that he sees immense value in the combined company. For one thing, the cost synergies alone will be a big boost to Disney's earnings. And Bob Iger's strong M&A track record is what has fueled Disney shares in the past.  

Disney has a right to match in a five-business-day window, and I suspect it will add some cash to its offer mix if that's what it will take to win a shareholder vote come July. Disney is already six months into this deal and to some degree, both sides have already been talking about it as if it's in the bag. It's not, but the Murdochs and Disney both clearly want the merger to take place and seem committed. That brings me back to timing. 

Yes, Tuesday's ruling signaled that we may really be in an anything-goes deal environment. The judge said the U.S. Justice Department failed to meet its burden of proof to show how a vertical merger of AT&T and Time Warner—two non-competitors—would be harmful to the industry and consumers. He said their witnesses were speculating on the future, rather than providing hard evidence. The DOJ, with egg on its face this week, won't want to lose another big case. 

All that said, are you willing to bet that Comcast, the biggest internet provider in the U.S., will skirt by regulators, and under a capricious administration and president who once said he'd seek to break up Comcast/NBCUniversal? I don't want to make this a debate about whether President Trump's personal ax-grinding is making its way into regulatory affairs because that trivializes an important conversation about how much power America's handful of media, telecommunications and technology giants should have. My point is that it seems awfully risky to assume a Comcast-Fox or Comcast-Disney merger is a slam dunk. One would think the DOJ would be better prepared in the next go-round.

Of course, Comcast disagrees:

“We are also highly confident that our proposed transaction will obtain all necessary regulatory approvals in a timely manner and that our transaction is as or more likely to receive regulatory approval than the Disney transaction.”

This bidding war also may not stretch out for too long. Both suitors have limitations that will splash some cold water on the ego-driven nature of dealmaking. For Disney, while I've written that shareholders will give Iger the benefit of the doubt due to his past deal wins (Pixar, Marvel, Lucasfilm), he can't risk overpaying and, in the twilight of his career, adding to the sad, lengthy list of megamergers gone wrong.

For Comcast, it comes down to how much debt it can bear. Buying Fox and Sky Plc, the British broadcaster that Fox partially owns and whose fate is also at stake in this bidding war, could make Comcast the country's new biggest corporate borrower. Unlike Disney, though, Comcast CEO Brian Roberts can pretty much do what he wants because regardless of what happens, Comcast's unusual articles of incorporation have him ingrained in the company.

On top of all this, Rupert Murdoch is 87 years old. His son James Murdoch, CEO of the Fox parent, seems to want to move on and do something different. They want to get this show on the road. 

Comcast could make a silly-expensive, knockout all-cash bid in the end if it wants. But this is Disney's deal to lose, and it may not need to alter its proposal much to get Fox's other shareholders on board. 

To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net

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