Disney and Fox Are Merging. Why Is Sky Still in Play?

(Bloomberg) -- What began as a simple bid in late 2016 by Rupert Murdoch's 21st Century Fox Inc. for the part of Sky Plc it doesn't already own sparked a transcontinental bidding war when Walt Disney Co. and Comcast Corp. joined the chase for Sky, a British broadcaster. Fox soon found itself in a tug-of-war between rival bidders, Disney and Comcast. Disney won -- its shareholders have approved a $71 billion merger with Fox's entertainment assets -- and while Comcast threw in the towel on Fox, it still covets Sky. In one of the more intriguing climaxes to a global media battle, Comcast is facing off against Disney/Fox in an auction for the European pay-TV company on Saturday. The Disney-Comcast-Fox-Sky drama is coming to a close, but few expect it to be the final act in a rapidly shifting media landscape.

1. What's driving these huge media deals?

Two entertainment giants, Disney and Comcast, had been fighting over Fox for one big reason: internet streaming. Movies, TV shows and other entertainment offered by Netflix Inc., Amazon.com Inc. and Hulu have grown so popular that Americans are abandoning cable-TV subscriptions in droves, eating into media companies' profits. Owning Fox will give Disney iconic entertainment assets -- from “The Simpsons” to the “X-Men” franchise -- that could make its own streaming TV services more compelling. Fox's 30 percent stake in Hulu would also give Disney majority ownership over one of the few real Netflix competitors, since each already owns 30 percent of Hulu.

2. Why is Sky getting so much attention?

Sky's 23 million customers in five European countries would give Comcast or Disney a rare opportunity to diversify out of the U.S. and reach more consumers directly. Sky boasts a market-leading platform, its Q box, which Comcast Chief Executive Officer Brian Roberts says leaves him “terribly impressed.” Sky also has a suite of sought-after TV content to lure and retain subscribers, including rights to Premier League soccer. Of the assets he's seeking to acquire from Fox, Disney CEO Bob Iger called Sky “a real crown jewel.”

3. What put Fox in play?

The Murdoch family wanted to sell some of the global empire it assembled over three decades. On June 20, Disney sweetened its bid for the Fox assets to $71.3 billion in cash and stock, up from $52.4 billion. The deal, which Fox accepted and shareholders approved in July, includes the 20th Century Fox movie and TV production house, Star India, a lineup of U.S. cable channels like FX and National Geographic, and Fox's 39 percent stake in Sky. Disney raised its bid -- it will also assume almost $14 billion of Fox's debt -- to trump Comcast's $65 billion offer. Fox preferred Disney because it considered the stock more valuable, and it worried that a deal with Comcast would meet regulatory snags.

4. What happens next with Sky?

The contest will come to a head in a one-day, three-round auction on Sept. 22, overseen by the U.K.'s corporate takeover regulator. Comcast's bid of 14.75 pounds ($19.30) a share is at a premium to Fox's 14 pounds a share, so Fox will get to respond to that with a first bid, then Comcast will have the opportunity to counter, and then both parties will have the chance to put in one more simultaneous bid each by the end of the day, which the Takeover Panel will reveal “as soon as practicable.” Sky shareholders are likely to choose the higher cash figure to maximize their returns, but they will have two weeks to make up their minds. In a dead heat, Comcast faces a higher bar to win them over, since Fox already owns 39 percent of Sky.

5. What about regulatory snags?

Comcast had waited to make a formal bid for Fox's entertainment assets until the fate of another so-called vertical deal, combining programming and distribution powerhouses, was decided: AT&T Inc.'s attempt to acquire Time Warner Inc., which the U.S. Justice Department had tried to block on antitrust grounds. A federal judge gave AT&T antitrust clearance to buy Time Warner, but the U.S. has appealed. Disney gained an edge over Comcast when it won U.S. antitrust approval for its purchase of Fox's assets.

6. What might the endgame look like?

Whichever U.S. giant wins will gain Europe's largest pay-TV business, with its content and direct-to-consumer technology. Disney could integrate the London-based assets into its entertainment empire, including the ESPN sports service and new streaming offerings. If Comcast wins out, the Philadelphia-based giant will look for synergies with its NBCUniversal news and entertainment arm and its huge cable broadband business.

7. What about the Murdoch dynasty?

It's being carved up. The family will still rule over a broadcast network, a cable sports channel, a business news channel and Fox News. The Murdoch family separately controls News Corp., which aside from British newspaper holdings also owns the Wall Street Journal and the book publisher, HarperCollins. The Murdochs in addition would hold a stake of more than 4 percent in Disney, ranking them among the largest shareholders.

The Reference Shelf

• A QuickTake explainer on why the AT&T-Time Warner approval could open the gates for future dealmaking.
• An interview with Richard Plepler, HBO's chief executive officer, on the golden age of television.
• A Bloomberg columnist writes that Disney is making a deal for the entertainment industry's past instead of its future.

--With assistance from Samuel Dodge, Anousha Sakoui, Christopher Palmeri and Thomas Seal.

To contact the reporters on this story: Joe Mayes in London at jmayes9@bloomberg.net;Gerry Smith in New York at gsmith233@bloomberg.net

To contact the editors responsible for this story: Rebecca Penty at rpenty@bloomberg.net, Paula Dwyer, Kevin Miller

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