Comcast Shies Away From Its Pursuit of Fox's Media Assets

The cable company is unlikely to make a counter bid. Disney is in the clear to take on Netflix

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Jul 16, 2018
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The media assets of Twenty-First Century Fox (FOXA, Financial) are apparently going to The Walt Disney Co. (DIS, Financial). Comcast (CMCSA, Financial) – the U.S.-based cable company – is unlikely to make another bid for the media assets of Fox as the media conglomerate is focusing on acquiring Sky Television, reports CNBC.

It was thought at first that Comcast will come out with a $75 billion bid to top Disney’s latest $65 billion offer for the media assets of Fox. Comcast took a different path and upped its bid for Sky Television to $34 billion, which is partially owned by Fox. The appeal from the U.S. department of justice to block the merger of AT&T (T, Financial) and Time Warner (TWX, Financial) might have put Comcast off in its pursuit for Fox’s media assets.

Comcast is choosing confrontation as evident from its counterbid for the pan-European media group. As Fox is also interested in acquiring the rest of Sky, Comcast is eyeing to beat Fox by dropping its pursuit for the media assets of Fox. Rupert Murdoch's media empire already owns 39% of Sky. A higher bid from Comcast for the media assets of Fox would mean Comcast will have to pay a higher amount to acquire Sky, according to Britain’s merger rules.

Why the Comcast-Fox marriage is getting unlikely?

Comcast is more likely to continue its pursuit for Sky rather than Fox’s media assets. Fox has already raised its concerns about the regulatory complications that may arise as a result of Comcast’s acquisition of the media assets of Fox. The potential merger with Comcast gives 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," said the management of Twenty-First Century Fox in an SEC filing recently.

DoJ’s appeal against the AT&T-Warner merger is another nail in the coffin for Comcast’s pursuit of Fox. Moreover, raising the bid further will make Sky more expensive for Comcast. All in all, Comcast is better off dropping its pursuit for Fox’s media assets.

Content is king

With CNBC – the subsidiary of Comcast – reporting the lack of further interest by the Philadelphia-based media conglomerate in the media assets of Fox, it’s safe to assume that Disney is going to secure the deal. The Disney-Fox merger will create one of the largest entertainment content providers the world has ever seen. With Fox’s media assets, Disney will get the ownership of one of the largest content creators, 20th Century Fox.

Moreover, content like Star Wars and Marvel films will also come under Disney’s umbrella. On the television side, the acquisition will give Disney rights to famous shows such as Modern Family. Lucas Films, Disney, Marvel and Pixar will be aggregated under one platform in case the acquisition goes through. The bottom line is Disney’s acquisition of Fox’s media asset will create a top-quality content provider that can take on Netflix (NFLX, Financial) in the streaming arena going forward.

Headwinds for Netflix

The consolidation in the media industry isn’t good news for Netflix as the company will have to increasingly rely on exclusive content to attract subscribers. Consequently, content costs are set to remain high in the media industry. Netflix’s low fees model might not be feasible going forward as the company continues to spend billions on content. All in all, Disney’s acquisition of Fox’s media asset is a serious threat for Netflix’s streaming domination. Given that the stock entails a skyrocketing price, the merger of Disney and Fox isn’t good news for Netflix’s investors.

Takeaways

  • It’s getting increasingly clear that Fox will fall in the hands of Disney, creating a viable competitor for Netflix on the streaming front.
  • This fact alone doesn’t make Disney attractive from an investors’ perspective as the company faces the same threat – content cost – as Netflix. Further, the company is paying a lot more than the fair value of Fox’s media assets, thanks to the bidding war with Comcast.
  • Investors should stay away from media players, especially Netflix, until the consolidation dust settles.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.