Comcast needs to front up if it wants the hand of Fox

The battle for the soul of the Murdoch empire is like a game of Russian dolls – and not the nerve agent infected type we’ve been hearing about in the news.

Initially Disney had offered to buy the bulk of 21st Century Fox TV interests, and in a clear and direct response, Comcast countered that it would make a direct offer for Sky, a separate public company in the UK, only partially owned, but effectively controlled by Fox. The latest turn of events is that Disney is prepared to buy Sky News, a tiny part of Sky – which to date has been at the heart of the UK finance regulator’s refusal to allow Fox to acquire the 61% of Sky that it does not already own.

The long term fear in the UK is that the Murdoch family have turned government elections on a headline, with sustained control of multiple news outlets both in newspapers at the top and the bottom of the class divide (the Sun and the Times), and on the TV, in particular on Sky News. Whether or not the Murdoch family has ever intervened in the news agenda at newspapers or TV channels they control is a moot point, with the family promising it has never pushed a particular policy. And yet Murdoch senior would invite Downing Street Politicians to parties and events, where he would “advise” them of his preferred policy, with the implication that if they did not do what he said, they might lose their majority at the next election.

But as social media platforms gain strength in influencing political decisions, so too do conventional news platforms hold less power.

Were Fox to acquire full control of Sky News, the fear is that Murdoch may change his mind about selling Fox to Disney and continue to hold more sway in UK elections than the Russian Hackers that are thought to have convinced Americans to vote in Donald Trump, despite this being unrealistic in a social media age.

Comcast has not, so far, followed up on its announcement of a bid to acquire Sky, and with it the loss making, but award winning Sky News TV Channel, which is perhaps why no official statement from the Board of Sky has been made saying whether or not Sky might accept the $31 billion Comcast bid. And that has left Fox free to continue addressing its original bid for the remaining $61% of Sky – for $16.4 billion.

Strangely the two bids are not that far apart. Comcast says it values the company at $31 billion but would be happy with as little as 50% plus one share, so a payment of $15.5 billion in total, whereas the Fox deal at around 16% below that price per share, would see it part with more overall cash, and have complete control of Sky.

The new terms from Fox say that it will deal with the media plurality issues which the financial regulator, the Competition and Markets Authority (CMA) has imposed, in one of two ways – either by segregating Sky News as a separate company in the Sky Group with its own management and guaranteed funding for 15 years, or it will sell it at the same time to Disney, which has no other news interests in the UK.

21st Century Fox issued a statement saying, “We have worked diligently with the CMA throughout its extensive review. In fact, we believe that the enhanced firewall remedies we proposed to safeguard the editorial independence of Sky News addressed comprehensively and constructively the CMA’s provisional concerns. These enhanced remedies went above and beyond what Ofcom, the expert, independent regulator on UK broadcasting, had stated would mitigate concerns around media plurality.

This neatly sidesteps the objections of the CMA and as if to underline the fairness of this offer, it added a sideswipe at politicians and their meddling in the matter.

“We are aware that a group of politicians that is opposed to the transaction is seeking to influence the CMA and is making a number of unsupported and fanciful assertions. If the CMA were to accept at face value these assertions and be dissatisfied with enhanced remedies that are a direct and reasonable response to concerns it had raised with us, we believe that this would compromise the integrity of a system which is supposed to be objective, evidenced-based and grounded on the application of established legal principles.”

Fox would then use UK courts to come down like a ton of bricks on the CMA and very likely win out. You can’t have discussions about how to protect media plurality and agree a compromise and then say “Well, actually, No.”

Fox would be in the position where the CMA won’t let it buy Sky and won’t let it sell its UK interests under realistic financial terms.

The CMA is right not to accept a management undertaking from Murdoch not to influence editorial choices at Sky News. But it could not be right to impose the same conditions on Disney, and Disney makes it clear it wants to own the Sky News channel even if the deal with Fox does not go through, so this could be completed as a precursor to Fox buying Sky, which makes it safe for the CMA to approve.

At one stroke it has made it impossible now for the Sky board to say “yes” to a pretty unspecified Comcast offer, since it must now evaluate selling Sky without Sky News and see which is best for shareholders.

Comcast could now respond with its own bid for Sky News or repeat its attempt to buy all of Sky or, as we said last week, enter via the front door and talk directly to Murdoch about besting the Disney approach for Fox which stands at $52.4 billion.

And here things get quite interesting. Disney and Comcast currently enjoy market capitalizations of $149 billion and $155 billion respectively. Neither have much cash in the bank, Disney around $4.6 billion and Comcast about $3 billion, because their businesses both throw off cash all the time. Comcast revenues are way larger at close to $84 billion and Disney more like $60 billion. Any deal that happens here will convey ascendancy on whichever firm completes it in terms of US stock market valuation. But both sets of shareholders have shrunk away from overseas deals, with Disney falling 16% from it’s all year high, but Comcast down far more recently 23% due entirely to the announcement of the Sky deal. US investors just do not like it.

And since both would have to go to debt markets for any cash element of the deals and use shares for the rest, it looks far more likely at this juncture that Disney will win the day, with slightly more tolerant shareholders.

We suspect that the Sky deal – with Disney buying Sky News – will get clearance, and the Sky board will approve it. There will be a lot of ho-ha from UK politicians, but mostly hot air. Unless Comcast risks the further ire of its shareholders, it will not risk a firm detailed offer and then the full Fox deal with Disney should complete.

The only remaining approach then might be for Comcast to go in the front door and compete headlong against Disney for all of Fox, not tinker around the edges with purely overseas operations. So either Comcast drops out or, it proposes the biggest merger in its history as its next move.