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Morningstar | Comcast Wins Auction for Sky With Bid of GBX 1,728; May Have Found the Winner's Curse

The bidding war for Sky is nearing an end. With neither Comcast nor Fox making an offer labeled as final, the U.K. Takeover Panel exercised its rights to take the bidding to a final auction. The auction was held Sept. 22, with Comcast bidding GBX 1,728 per share, 10% more than Fox’s GBX 1,567 offer. Both offers were significantly higher than their previous bids of GBX 1,476 and GBX 1,400, respectively. The offers are great for Sky shareholders, but we believe Comcast will struggle to generate a decent return on its investment, as we already thought the previous offers exceeded Sky’s fair value.

Comcast’s higher bid adds GBP 4.4 billion ($5.7 billion) to the purchase price versus its previous offer, taking its total bid to GBP 30.6 billion ($40.0 billion). This additional payment is only 3.3% of Comcast’s market capitalization. Further, if we assume Comcast overpaid by 40% for Sky’s equity, the shareholder value lost would equal about $2.50 per share. So, while we think Comcast got carried away in the bidding it won’t be too detrimental to our Comcast fair value estimate. We’re also maintaining our wide moat rating on the firm. On the other hand, we are increasing our fair value estimate for Sky to Comcast’s offer price of GBX 1,728 and are maintaining our narrow moat rating.

Sky shareholders now have until Oct. 11 to vote for either offer. However, with Comcast’s offer more than 10% higher than Fox’s, we expect Comcast’s offer will win the day despite Fox already owning 39% of Sky’s shares. With this high of an offer and knowing it will lose control anyway, Fox and Disney may choose to tender the Fox-owned shares, which Disney will soon take over. Once the vote is complete, we expect the deal to quickly close. While extremely unlikely, in our view, if fewer than 50% of Sky shareholders (about 82% of non-Fox shareholders) tender, the deal could still fall apart, which would likely push the stock price below our standalone fair value estimate of GBX 1,260.

If Comcast is successful in capturing 100% of Sky’s shares, the firm’s net debt load would increase to about 3.4 times EBITDA, up from about 2.1 times currently. While significantly higher than Comcast has supported over the past 15 years, this level of leverage is still lower than Comcast’s cable peers Charter and Altice in the U.S. We do expect, however, that the firm’s elevated debt load would constrain shareholder returns, beyond modest dividend increases, for the foreseeable future.