News Disney and Fox come to terms -- announcement soon; huge IP acquisition

[Stripes]

At first I thought that WSJ article was a bit of propaganda pro-Comcast, but after thinking about it all day, it really makes Roberts look small.

Definitely. If I was Roberts, I'd be embarrassed. I keep thinking, who are the article's sources? Something tells me Rupert put that story out on purpose. It's the WSJ, after all.

Anyway, I've been looking at the financials and it's clear to me more than ever that Disney is winning this. The only question was whether they were willing to lever up for this transaction, and that was made crystal clear on Wednesday. Comcast stock is going up because investors think they're going to walk away. If they make another bid, the stock will tank.

 

[happycamperuni]

So between Disney's new bid, the DOJ approval leak, and that new WSJ article, I don't think Comcast will counter. Might be wrong, but as it stands I think it has probably sunk in that they're not winning this fight.

Definitely. If I was Roberts, I'd be embarrassed. I keep thinking, who are the article's sources? Something tells me Rupert put that story out on purpose. It's the WSJ, after all.

Anyway, I've been looking at the financials and it's clear to me more than ever that Disney is winning this. The only question was whether they were willing to lever up for this transaction, and that was made crystal clear on Wednesday. Comcast stock is going up because investors think they're going to walk away. If they make another bid, the stock will tank.

The stock would only tank if investors think Comcast is going to win. Right now investors seem to think Comcast won't win regardless of what kind of bid they make.

It's like AT&T stock, AT&T's stock was going up until the actual ruling by the judge; their bid for TW wasn't really accounted for in their stock because the assumption was that there would be months of legal limbo for the TW merger. Instead, the judge ruled completely for AT&T and so AT&T's stock fell 5%.

I think there's 2 possibilities here:
1) If Comcast makes an all-cash bid at $78-80 billion, the markets won't take it seriously. They'll assume Disney will just add another $5 billion in cash and $5 billion in stock to outbid Comcast again. In that case, I wouldn't expect much movement in Comcast's stock price. They're just adding more debt to Disney's balance sheet by bidding it up.

2) If Comcast makes a 50-50 cash/stock bid at $78-80 billion, then the market will take that more seriously because they think Comcast would be willing to outbid Disney (since they'd technically still be able to add billions of cash/stock to that bid). So then the bidding war would be serious and might reach a number like $90 billion...

 

[seascape]

The stock would only tank if investors think Comcast is going to win. Right now investors seem to think Comcast won't win regardless of what kind of bid they make.

It's like AT&T stock, AT&T's stock was going up until the actual ruling by the judge; their bid for TW wasn't really accounted for in their stock because the assumption was that there would be months of legal limbo for the TW merger. Instead, the judge ruled completely for AT&T and so AT&T's stock fell 5%.

I think there's 2 possibilities here:
1) If Comcast makes an all-cash bid at $78-80 billion, the markets won't take it seriously. They'll assume Disney will just add another $5 billion in cash and $5 billion in stock to outbid Comcast again. In that case, I wouldn't expect much movement in Comcast's stock price. They're just adding more debt to Disney's balance sheet by bidding it up.

2) If Comcast makes a 50-50 cash/stock bid at $78-80 billion, then the market will take that more seriously because they think Comcast would be willing to outbid Disney (since they'd technically still be able to add billions of cash/stock to that bid). So then the bidding war would be serious and might reach a number like $90 billion...

Even if Comcast makes another bid I don't think Disney will go any higher and just leave it to the Fox stockholders to decide. I expect more than half would take the Disney offer of .1664 shares of Disney stock plus 19.00 cash over 41.00 of Comcast cash as I fully expect Disney stock to be in excess of $114.32 by closing. So the Disney offer is actually in excess of $38.00 a share.

 

[Stripes]

The stock would only tank if investors think Comcast is going to win. Right now investors seem to think Comcast won't win regardless of what kind of bid they make.

It's like AT&T stock, AT&T's stock was going up until the actual ruling by the judge; their bid for TW wasn't really accounted for in their stock because the assumption was that there would be months of legal limbo for the TW merger. Instead, the judge ruled completely for AT&T and so AT&T's stock fell 5%.

I think there's 2 possibilities here:
1) If Comcast makes an all-cash bid at $78-80 billion, the markets won't take it seriously. They'll assume Disney will just add another $5 billion in cash and $5 billion in stock to outbid Comcast again. In that case, I wouldn't expect much movement in Comcast's stock price. They're just adding more debt to Disney's balance sheet by bidding it up.

2) If Comcast makes a 50-50 cash/stock bid at $78-80 billion, then the market will take that more seriously because they think Comcast would be willing to outbid Disney (since they'd technically still be able to add billions of cash/stock to that bid). So then the bidding war would be serious and might reach a number like $90 billion...

1. I don't seriously think Roberts is that irrational. Comcast is not going to chase something for the sake of raising Disney's costs. They're not going to risk something that would damage the company, and perhaps even a shareholder lawsuit. They've already lost enough credibility as it is. Comcast is looking at a multi-notch credit downgrade even at their current bid. If Comcast were to put out a truly compelling new bid (They would have to after the DOJ leak), their credit rating would likely dip below investment grade, assuming Fox accepted.
2. Comcast's CFO has previously stated that the company is unwilling to use stock. Back in April, when the stock was slightly higher than it is today he said: "I don’t see us using stock at these levels — period," with regard to acquisitions.

 

[happycamperuni]

Even if Comcast makes another bid I don't think Disney will go any higher and just leave it to the Fox stockholders to decide. I expect more than half would take the Disney offer of .1664 shares of Disney stock plus 19.00 cash over 41.00 of Comcast cash as I fully expect Disney stock to be in excess of $114.32 by closing. So the Disney offer is actually in excess of $38.00 a share.

The Murdochs cancelled their shareholder vote. I think they're going to let the bidding war play out, and whoever declines to match or raise, they'll submit the highest offer that they like to their shareholders.

1. I don't seriously think Roberts is that irrational. Comcast is not going to chase something for the sake of raising Disney's costs. They're not going to risk something that would damage the company, and perhaps even a shareholder lawsuit. They've already lost enough credibility as it is. Comcast is looking at a multi-notch credit downgrade even at their current bid. If Comcast were to put out a truly compelling new bid (They would have to after the DOJ leak), their credit rating would likely dip below investment grade, assuming Fox accepted.
2. Comcast's CFO has previously stated that the company is unwilling to use stock. Back in April, when the stock was slightly higher than it is today he said: "I don’t see us using stock at these levels — period," with regard to acquisitions.

I know the CFO said they wouldn't use stock earlier. But that was when Disney wasn't offering cash in their bid. I assume Disney's new bid changes their calculus, but we have to wait and see.

Regardless, I find it hard to believe that Roberts was bidding $65 billion cash as his final offer. That felt like an opening offer, and I don't see the bidding closing below $80 billion.

Fox's assets are so unique, and now that TW is off the board, there's no consolation prize. The other studios and other sets of media assets just don't compare to what Fox has. That's why I think whoever wins will end up overpaying.

 

[seascape]

The Murdochs cancelled their shareholder vote. I think they're going to let the bidding war play out, and whoever declines to match or raise, they'll submit the highest offer that they like to their shareholders.


I know the CFO said they wouldn't use stock earlier. But that was when Disney wasn't offering cash in their bid. I assume Disney's new bid changes their calculus, but we have to wait and see.

Regardless, I find it hard to believe that Roberts was bidding $65 billion cash as his final offer. That felt like an opening offer, and I don't see the bidding closing below $80 billion.

Fox's assets are so unique, and now that TW is off the board, there's no consolation prize. The other studios and other sets of media assets just don't compare to what Fox has. That's why I think whoever wins will end up overpaying.

As I said, the current offer of 38 a share is all Disney should pay. If the rumors that Comcast will offer 41 a share which equates to a out 79 billion Disney should let the stockholders decide. The one plus feature is that it is up to the Fox shareholders to request cash or stock. I am sure there is a deal that the Murdochs will get all stock. That would guarantee them a price of 38 or more. The tax deferral will save them well Bbn over 20% more or over 45 a share. That will mean their 17% will vote for Disney. Then the rest can see where they wind up. But I am sure many will find the offer is better because ev er n just saving 20% of 19 adds 3.80 to the value and that is a cash equivalent of 41.80.

 

[Stripes]

The Murdochs cancelled their shareholder vote. I think they're going to let the bidding war play out, and whoever declines to match or raise, they'll submit the highest offer that they like to their shareholders.


I know the CFO said they wouldn't use stock earlier. But that was when Disney wasn't offering cash in their bid. I assume Disney's new bid changes their calculus, but we have to wait and see.

Regardless, I find it hard to believe that Roberts was bidding $65 billion cash as his final offer. That felt like an opening offer, and I don't see the bidding closing below $80 billion.

Fox's assets are so unique, and now that TW is off the board, there's no consolation prize. The other studios and other sets of media assets just don't compare to what Fox has. That's why I think whoever wins will end up overpaying.

That statement was a pretty strong rejection. Going back on their word on such a clear statement would lose a lot of credibility with their investors. In addition, Murdoch and the Fox board already view Comcast stock as a weak currency. It just doesn't make sense.

Conversely, I think that bid was positioned as a death blow to Disney. All the "behind-the-scenes" articles I've read have suggested that Comcast thought Disney would really struggle to even match their offer, let alone overtake it by $6 billion. In addition, I think this may in fact be Comcast's best offer. Reading the proxy, Comcast was willing to walk away at $65 billion back in December. Why would anything be different now? They couldn't have gotten Time Warner anyways for antitrust reasons. Turner would've given both Disney and Comcast too much cable concentration. Disney started at $23/share and I don't think Comcast anticipated that they would return with such a high bid.

As crazy as it is, the real problem for Comcast is their balance sheet. They just don't have the firepower to go meaningfully higher without wrecking their finances.

Here is Moody's statement regarding Comcast's anticipated downgrade after their $65 billion offer:

New York, June 14, 2018 -- Moody's Investors Service ("Moody's") stated that Comcast Corporation's ("Comcast") (A3; ratings on review for downgrade) all-cash offer of $35 per share (about $65 billion) to acquire the businesses that 21st Century Fox America, Inc. ("21CF") (Baa1; ratings on review for upgrade) wholly owned subsidiary of Twenty-First Century Fox Inc., has agreed to sell ("Fox") to the Walt Disney Company is credit negative for Comcast. The transaction would also include the assumption by Comcast of $20 billion of outstanding Fox debt.The offer is consistent with our expectations when we placed Comcast on review for downgrade on May 23, 2018, which considered the new debt associated with a Fox acquisition net of cash on hand, the assumption of Fox debt, $15.4 billion of new debt associated with the offer to acquire all the equity of Sky plc ("Sky") (Baa2; developing outlook), and assumption of Sky's $12.1 billion in debt.

The total pro forma debt for the combined companies would be approximately $170 billion of total debt, the world's second-most indebted company (excluding financial institutions and government-related entities) after pro forma AT&T-Time Warner once it closes. Assuming about $40 billion of EBITDA after synergies, pro forma leverage would be about 4.25x, which represents a material change in financial risk tolerance for Comcast's A3 long-term debt ratings. The combined entities are expected to generate considerable free cash flows which we believe would be sufficient to repay debt maturities as they come due, resulting in minimal capital market risk after closing if successful. We believe that this is very important given the amount of outstanding debt, secular pressures on linear pay TV and slowing cable industry growth.

As we stated in an Issuer In Depth publication titled Comcast Corporation: If it materializes, cash purchase of FOX's entertainment assets would be a major shift in financial policy, dated May 15, 2018, we do expect there to be growth in EBITDA, but we also believe growth is moderating. With an EBITDA growth rate of 4% per year for the consolidated entity, beyond the synergies in the year leading up to closing and the first two years after, Comcast would still need to reduce indebtedness by around $45 billion to return to 2.75x leverage. Given our expectations for free cash flows, achieving A3 leverage targets in less than three years would be challenging to achieve without proceeds from some asset sales or a dividend cut. In our opinion, as time passes, avoiding share repurchases and additional acquisitions will also be challenging. In addition, we believe that even following these transactions, transitioning Comcast's media businesses to be more competitive with the rapid growth in subscription-on-demand consumption and services like Netflix, Inc. (Ba3; stable outlook) will still require significantly more content expenditures than what is currently being spent, which could pressure free cash flows as they gradually build traction. Additional stock buybacks prior to closing these transactions if they are successful getting an agreement with Fox, and even sustaining dividend payments while leverage is elevated, both undermine credibility surrounding commitment to the A3 long-term debt ratings.

In comparison, Moody's anticipates they will downgrade Disney one notch to A3 (where Comcast is now) if their $71 billion bid goes through.

 

[Stripes]

Interesting fact: Disney's original bid with a transaction value of $66.1 billion, is exactly proportional to the AT&T - Time Warner transaction value on a revenue basis.

I've also done some studying of the transaction call from Wednesday, and it seems to me that Disney is AT LEAST willing to go to $85 billion, and likely much more given their willingness to go up to 4x leverage.

 

[Indy_UK]

Comcast was willing to play ball and let Disney have the Marvel and domestic rights:

https://www.wsj.com/articles/standi...ox-media-titans-rocky-relationship-1529617091

Says I need to subscribe to read the article. Is that actually the case then and Comcast would have given Disney the rights back?

Hopefully there's something from Fox (Simpsons, Family Guy, Seth McFarlane maybe) which Disney doesn't want and will give to Universal in exchange....

 

[the.dreamfinder]

Says I need to subscribe to read the article. Is that actually the case then and Comcast would have given Disney the rights back?

Hopefully there's something from Fox (Simpsons, Family Guy, Seth McFarlane maybe) which Disney doesn't want and will give to Universal in exchange....

It was posted in full a couple pages back.

 

[Cmdr_Crimson]

Hopefully there's something from Fox (Simpsons, Family Guy, Seth McFarlane maybe) which Disney doesn't want and will give to Universal in exchange....

Seth Didn't have a problem playing a parody version of his ownself on Phineas and Ferb....

Dan Povenmire (voice of Dr Doofenshmirtz) worked on Family Guy until 2004 making some of the first few seasons including the Stewie & Brian "Road To" episodes.

 

[imperius]

Comcast was willing to play ball and let Disney have the Marvel and domestic rights:

https://www.wsj.com/articles/standi...ox-media-titans-rocky-relationship-1529617091

Unless someone left something out when they posted that. No where did I read anything about giving up Marvel.

 

[BrianLo]

I hate to be the debbie downer in the eternal optimism, but WDW's access to Marvel is about the last thing in the world Bob or Comcast cares or would think about.

The company does not revolve around WDW. They have easily 10 other terribly under-utilized near-to-billion dollar franchises to burn through first, without mention of the fact there are already Marvel properties they can use.

So let's all take a deep breath and accept it's incredibly unlikely the theme park Marvel rights will ever go back to Disney and even more unlikely they'd actually use them.

 

[Stripes]

Unless someone left something out when they posted that. No where did I read anything about giving up Marvel.

Comcast offered to let Disney keep the domestic assets, in other words the studios, RSNs, and cable networks. That would obviously include the film rights to the Marvel characters under the Fox umbrella. Nothing was said with regard to Marvel theme park rights.

 

[imperius]

Comcast offered to let Disney keep the domestic assets, in other words the studios, RSNs, and cable networks. That would obviously include the film rights to the Marvel characters under the Fox umbrella. Nothing was said with regard to Marvel theme park rights.

Gotcha. What I assumed but didn’t even see that.

 

[Biff215]

I hate to be the debbie downer in the eternal optimism, but WDW's access to Marvel is about the last thing in the world Bob or Comcast cares or would think about.

The company does not revolve around WDW. They have easily 10 other terribly under-utilized near-to-billion dollar franchises to burn through first, without mention of the fact there are already Marvel properties they can use.

So let's all take a deep breath and accept it's incredibly unlikely the theme park Marvel rights will ever go back to Disney and even more unlikely they'd actually use them.

I certainly agree with your last statement that it’s highly unlikely Universal will ever give up the theme park rights, but disagree that it’s not something Iger and management think about. It’s really limiting their options in WDW while Universal capitalizes on their characters. While it might not factor into this much larger deal, I wouldn’t be surprised if it gets floated out there in the future. This is the company that traded Al Michaels for Oswald.

 

[imperius]

I certainly agree with your last statement that it’s highly unlikely Universal will ever give up the theme park rights, but disagree that it’s not something Iger and management think about. It’s really limiting their options in WDW while Universal capitalizes on their characters. While it might not factor into this much larger deal, I wouldn’t be surprised if it gets floated out there in the future. This is the company that traded Al Michaels for Oswald.

Limiting their options? Disney hasn’t used the theme park rights anywhere well at all for marvel. Mainly just overlays of old rides, a crappy music show, and now a coaster. Disney isn’t really worried about it. If they were, they would have used the rights they have better.

 

[Stripes]

I've been studying the numbers of what Disney would look like if they put out a $90 billion bid, assuming 50/50 cash/stock, and compared that to the impact of a $90 billion all-cash bid from Comcast.

Disney would increase their debt from their current bid of $74.79 billion to $84.14 billion. This would increase their leverage from 3.1x to 3.5x assuming 39% stake in Sky. (I didn't run the numbers including Sky simply because I think they'll give it up/sell it if they have to.)
This is something Disney would be comfortable with.

Disney would also have to issue about 96 million more shares at the midpoint of the existing collar for a total of 439 million new shares, this compares to initial and current bids of 515 million and 343 million shares, respectively. The midpoint is currently situated at roughly $104/share, about $2 dollars less than their current share price. This would mean that Fox shareholders would hold roughly 23% of the pro forma company. This is more than the current bid of 19%, but less than the initial bid where they would hold 25%. Disney should also be comfortable here.

Raising Comcast's bid to $90 billion all-cash would increase their debt from $170 billion to $195 billion, assuming there is no increase in their Sky bid, which there is likely to be, but I didn't include it for the sake of comparison. This would increase their leverage from 4.25x to 4.88x, in other words it would take them 5.36 years to pay down their debt to reasonable levels versus the 4.1 years of their current bid, assuming a decrease of half a turn of leverage per year.

With this model, Disney would be able to return to attractive leverage 2.76 years before Comcast. I should also note that going this high for Comcast would almost certainly devastate their credit rating.

Have fun picking this apart!

Edit: Post has been edited so that all figures account for synergies.

 

[seascape]

I've been studying the numbers of what Disney would look like if they put out a $90 billion bid, assuming 50/50 cash/stock, and compared that to the impact of a $90 billion all-cash bid from Comcast.

Disney would increase their debt from their current bid of $74.79 billion to $84.14 billion. This would increase their leverage from 3.4x to 3.82x assuming 39% stake in Sky. (I didn't run the numbers including Sky simply because I think they'll give it up/sell it if they have to.)
This is something Disney would be comfortable with.

Disney would also have to issue about 96 million more shares at the midpoint of the existing collar for a total of 439 million new shares, this compares to initial and current bids of 515 million and 343 million shares, respectively. The midpoint is currently situated at roughly $104/share, about $2 dollars less than their current share price. This would mean that Fox shareholders would hold roughly 23% of the pro forma company. This is more than the current bid of 19%, but less than the initial bid where they would hold 25%. Disney should also be comfortable here.

Raising Comcast's bid to $90 billion all-cash would increase their debt from $170 billion to $195 billion, assuming there is no increase in their Sky bid, which there is likely to be, but I didn't include it for the sake of comparison. This would increase their leverage from 4.25x to 4.88x, in other words it would take them 5.36 years to pay down their debt to reasonable levels versus the 4.1 years of their current bid, assuming a decease of half a turn of leverage per year.

With this model, Disney would be able to return to attractive leverage 2 years before Comcast.

Have fun picking this apart!

If either company bid 90 billion the entire Board and management should be put in jail for stealing from existing stockholders. There is no way Fox is worth that much.

 

[Stripes]

If either company bid 90 billion the entire Board and management should be put in jail for stealing from existing stockholders. There is no way Fox is worth that much.

I agree! It would definitely be crazy, crazy bid, and I don't think either company is necessarily willing to go here, but Disney is in a stronger position should they have to. After Wednesday, I believe Disney sees Fox as an absolute must-win.

For curiosity's sake, what's your max? I'll try to run the numbers for that.