The streaming media battle is getting out of hand as The Walt Disney Company (DIS, Financial) upped its original bid to $38 a share last week, in response to the Comcast’s (CMCSA) $35 a share all-cash bid for the media assets of Twenty-First Century Fox (FOXA, Financial). The revised bid from Disney entails a hefty 36% premium over its previous $28 a share offer for Rupert Murdoc’s media empire.
Things are not looking good for Comcast as the U.S. department of justice (DoJ) has already given a green signal to the pending acquisition by Disney of Twenty-First Century Fox. Fox seems uninterested in selling to Comcast amid potential regulatory hurdles that may follow. The New York based media company has concluded that a merger with Comcast entails more antitrust risks as the antitrust division of U.S department of justice is not very fond of vertical integrations. This can give rise "to the possibility of significant delay in the receipt of merger consideration as well as the risk of an inability to consummate the transactions," noted the management of Twenty-First Century Fox in an SEC filing recently.
Comcast isn’t giving up though as the company might come out with a $40 a share bid, translating into an astonishing $75 billion price tag for the media assets of Twenty-First Century Fox. "Given the strategic importance of the Fox assets, we expect Comcastwill come back with a higher offer," wrote Jefferies Analyst, John Janedis, in a note to clients last Wednesday. Comcast can also potentially reach out to private equity investors in case the bidding war reaches around $90, noted the Wall Street Journal; the current relevant bid stands at $71.3 billion from Disney.
Disney has the lead
It seems that Fox is more inclined towards a sale to Disney rather than Comcast as evident from the regulatory filing detailing the reasons of the refusal of a $35 a share bid from Comcast. However, AT&T (T, Financial) already acquired Time Warner Cable (TWX, Financial), paving the way for vertical mergers; the risk that DoJ might block the deal because of the vertical nature of the merger is remote. Nonetheless, Fox cited vertical integration as a reason for not pursuing the merger with Comcast. As things stand now, Fox is rating Disney ahead of Comcast for selling its prized media assets.
A worthy competitor for Netflix
If Disney succeeds in acquiring Fox’s assets, it will be more like Netflix – an entertainment content provider without a conventional distribution channel unlike AT&T and Comcast. The company will have to rely on cable companies like Comcast, or its own upcoming streaming service, to deliver entertainment content. In effect, Disney will compete on equal footing with the red streaming giant Netflix.
Conventional media and net neutrality
However, a Fox-Comcast merger will be interesting. Comcast has the leverage of a distribution network, which can be used to up sell the entertainment content acquired from Fox. The merger will be more like the AT&T-Warner merger with distribution leverage.
Moreover, both AT&T and Comcast will have the ability to throttle the content of counterparts like Netflix, thanks to the death of net neutrality. In short, the acquisition of Fox by Comcast will be more problematic for standalone streaming services like Netflix as cable and internet services companies have the distribution leverage and can benefit from the abolished net neutrality.
Takeaways
Disney is expected to steal away the media assets of Fox from Comcast given the regulatory fears assumed by the management of Twenty-First Century Fox in relation to Comcast-Fox merger. The merger will potentially create a direct competitor for Netflix, resulting in content wars and high content creation costs for both media houses going forward.
Disney-Fox merger is also better for AT&T as Comcast won’t be able to compete with AT&T on equal footings in terms on entertainment content. AT&T will be the only company with diverse content library and a conventional distribution channel in case Comcast fails to acquire Fox’s media assets.
Either way, Netflix’s investors are in a tough spot. Content costs are expected to go up for Netflix amid consolidation in the entertainment industry; margins will also come under pressure as Netflix will have to strike deals with the likes of AT&T and Comcast in order to avoid possible throttling of its service on AT&T and Comcast’s network.
Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.
