April 25, 2018 / 8:00 PM / in a year

Breakingviews - Comcast is best leaving Fox to the Mouse

Disney character Mickey Mouse is seen above the entrance at Disneyland Paris ahead of the 25th anniversary of the park in Marne-la-Vallee, near Paris, France, March 16, 2017. REUTERS/Benoit Tessier

NEW YORK (Reuters Breakingviews) - Comcast boss Brian Roberts already made a bid for parts of Twenty-First Century Fox, and failed. Now he has left the door ajar for another lurch. It would be better to walk away.

Roberts seems to be in the mood for mergers. He confirmed on Wednesday morning a $31 billion offer for European pay-TV company Sky. That’s 16 percent higher than an offer already made by Fox, which is trying to buy the 61 percent of Sky it doesn’t already own in order to then sell the whole thing to Walt Disney. Second, Roberts promised during an earnings call not to use the company’s sagging shares as an acquisition currency – but pointed to the strength of Comcast’s balance sheet, in a strong signal that he is open to further deals funded by cash.

Pledging not to use stock for deals is fair enough. Shareholders often don’t like dilution. But the risk is that Roberts might be tempted to reprise his bid for some other bits of Fox, which Disney has agreed to buy for $66.1 billion including debt. Comcast tried that once before, but was knocked back by Fox’s chairman and presiding shareholder, Rupert Murdoch.

Here’s why Roberts ought to refrain. The Fox assets might make $3.8 billion in operating profit in 2018, taking Bernstein EBITDA divisional estimates and assuming operating profit is split among the Fox businesses in the same proportions. Assume Comcast can drive out $1.5 billion of savings, less than Disney’s estimate of $2 billion, and the total hits $5.3 billion. Tax that, and for a deal valued at $66 billion, Comcast’s return on investment would be about 6 percent. And that’s even if Comcast matches, rather than tries to best, Disney’s offer.

True, Roberts would be saving Disney from itself. The Magic Kingdom’s return on investment, even with higher cost savings, is still below 8 percent. But that’s no consolation to Comcast shareholders, who would be left with a value-destroying deal. Fox originally swatted away Comcast’s offer because of regulatory risk, and it’s unlikely Murdoch would have wanted to hold shares in a company Roberts controls. Comcast should thank him – because trying again, even in cash, would simply be a bad idea.


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