Yesterday, Comcast announced that it is making an unsolicited $31 billion bid for Sky PLC, exceeding the offer by Robert Murdoch’s Fox by 1.75 pounds (GBP) per share. That sent the stock down over 7% and created a fantastic buying opportunity.
Which company ends up winning the deal is irrelevant to me. Comcast will continue to grow, and football (soccer) will become more mainstream in America. If Comcast wins, the debt will grow, but so will the net earnings.
Sky’s technology lured Comcast CEO Brian Roberts. On a trip to the U.K. in November with Dave Watson, head of Comcast Cable, the pair took an in-store demo of Sky’s products, spending considerable amount of time going through every feature and comparing it to Comcast’s own X1 platform, which lets subscribers search for movies and TV shows through a Netflix-like user interface and a voice-activated remote control.
Roberts had this to say: “We were really terribly impressed, seeing it again and listening to the passion of the sales, and looking at the product, and seeing the success in their earnings -- all those things combined to reinforce what a number of us have known for years, this is a jewel.”
This is a good time to get a deal done. While the pound-to-dollar rate isn’t as desirable as it was late in 2016 into 2017, it is still lower than historic averages at just $1.38 per British pound. SKY’s price tag could look cheap if the pound rises to $1.60 again.
In recent years, the net income at Sky has fallen as sales have grown. The company’s operating margins have fallen and are now in the single digits. Not great, but then again, it does have a dominate position on cable and internet distribution in the U.K., a market that is consuming media as rapidly as we do in the U.S. This acquisition would likely push Comcast’s annual revenue turn above $100 billion and increase its international footprint to 25% from 9%. At 20% margins and a 19x historic price multiple, if successful, it could double its market value.
It’s true that over the past decade, telecom, cable and media companies have seen the size and power they once enjoyed be disrupted by tech firms. But, remember when Google tried to be an internet provider? The big-name technology companies create content, rarely infrastructure, and usually not distribution networks.
The point is that Comcast has and will continue to have a wide moat based on the groundwork it's already laid. Consumers will still connect to the internet and even if the younger generation cuts the cord, they’ll still consume content via the television, phone, tablet and whatever extended reality device comes next. That will require faster and better internet connections. Comcast is already able to fill that gap, and has gone a long way to fix the customer service issues that has plagued it for years.
The company has 47 gurus onboard, including all the big name hedge fund managers: Soros, Cohen, Dalio, Tudor Jones, Greenblatt, Gabelli, Yacktman, Tepper. I can’t imagine it’s for the small 1.72% dividend alone.
Disclosure: I am not long/short any stock mentioned in this article, but may buy SKY PLC stock in the next 72 hours.
