The media consolidation saga continues as Comcast (CMCSA, Financial) – the largest provider of cable services in the U.S. and the owner of NBC Universal – has come out with a $35-a-share all-cash bid for the media assets of Twenty-First Century Fox (FOXA, Financial), including Fox movies and TV studios.Â
Comcast delivered an offer letter to the board of directors of Twenty-First Century Fox yesterday in a move to outbid Disney (DIS, Financial); the Walt Disney Co. wanted to acquire the media assets of Twenty-First Century Fox last year for $52.4 billion in an all-stock offer.Â
Disney has yet to respond with a counter bid but, given the race for content domination, it might come out with a higher bid.
The market is holding tight as both Disney and Comcast are unmoved in pre-market trading. Comcast is down 0.6% while Disney is holding ground, down 0.1%.
What are the terms of the offer?
Comcast is suggesting an all-cash deal, worth $64.8 billion, for the prized assets of Twenty-First Century Fox, which is significantly higher than the $52.4 billion offer by Disney. Comcast is also matching Disney for the reverse termination fees of $2.5 billion, in case the deal gets blocked by regulators. It is also willing to pay the break-up fees of $1.5 billion on behalf of Twenty-First Century Fox to Disney, adding a total of $4 billion in extra costs. It is worth mentioning that Bank of America Merrill Lynch and Well Fargo are confident enough to arrange the staggering $65 billion financing for the deal.
The deal will take the leverage (debt-to-equity) of Comcast to an alarming high of 4x, according to one of the executives. However, management said it will bring debt back down to a reasonable level using the cash flow it generates.Â
What does it mean for internet streaming, especially Netflix?
Comcast will get a majority share of the streaming service Hulu if the deal goes through. Alongside Disney and Fox, Comcast already has a stake in Hulu, which is the direct competitor of Netflix. A merger with Fox will give Comcast a controlling stake in Hulu. However, the company is willing to divest Fox’s stake in Hulu if that’s what it takes for the deal to go through.
Moreover, acquisition of Fox’s media assets will beef up the content universe of Comcast, allowing it to compete against the likes of Netflix (NFLX, Financial). Given Comcast’s cable network in the U.S., the company can push its entertainment content swiftly to U.S. subscribers. The company already offers Xfinity stream, a cord-free streaming service.
Disney can also grow its upcoming internet streaming service in case Fox decides in favor of the California-based entertainment company. In either case, competitive pressure will mount on Netflix. Moreover, AT&T (T, Financial) can also leverage Time Warner (TWX, Financial)'s HBO and Warner Bros, and use its own DirecTV streaming and HBO NOW to go head to head with Netflix.
In essence, two things are becoming increasingly apparent in the streaming industry. One, content is king. Second, it’s exclusive.
As mega media mergers go through, cross licensing of content will disappear. For instance, AT&T probably won’t offer its prized HBO content to any other media house in order to keep its streaming service relevant. Content is set to become fragmented across different platforms. As cord cutting continues, consumers will subscribe to multiple streaming packages to aggregate their favorite movies and TV shows. Furthermore, as companies fight for subscribers, content costs will go up.
In short, the wave of consolidation in the industry is set to increase content costs and increase the potential for fragmentation of content across different streaming platforms. This means that streaming services like Netflix will struggle to dominate the market going forward.
It is worth mentioning that the whole Netflix bull thesis is based on the company’s ability to aggregate content and offer it to subscribers at a low price. As media companies pull their content from Netflix, the streaming giant’s domination will fade away. Moreover, given the deep pockets of media giants like AT&T-Warner, Disney and Comcast, Netflix will find it increasingly difficult to compete by spending leveraged dollars on content creation.
Final thoughts
The AT&T-Warner merger and the showdown between Comcast and Disney for the assets of Twenty-First Century Fox is a wake-up call for the investors of the streaming giant. Content fragmentation due to media consolidation is diminishing Netflix’s chances at being the undisputed entertainment hub. Moreover, high content costs amid a race of original content between the media giants will continue to put pressure on Netflix’s earnings and financial health. The consolidation in the industry is a cue for investors to take profits and dump Netflix for now.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
