The back-and-forth bidding war between Comcast (CMCSA, Financial) and Disney (DIS, Financial) for the assets of Twenty-First Century Fox (FOXA, Financial) is becoming prohibitively expensive. The staggering sums offered place both suitors in a position where the victor will have to demonstrate, rather quickly, the value gained by converting the assets of Fox justified the astounding price tag.
Disney’s latest offer of $71.3 billion represents a 36% increase over its original offer of $52.4 billion. And the bidding war is by no means over. Comcast has entered into discussions with private equity partners to raise additional cash for a counteroffer, which could be in the phenomenal $80 billion to $90 billion range.
Even if Comcast teams up with private equity investors, it already was on track to assume $170 billion in debt since its previous $65 billion offer. Were Comcast to prevail over Disney, the cash necessary for the purchase would make it the second most indebted corporation in the world. Most of this funding would come from the junk bond markets, which are increasingly demanding more yield given the unprecedented levels of existing corporate debt worldwide.
In short, the cost to acquire the Fox properties is going to leave little room for error in what is evolving into an unforgiving digital streaming market environment.
Managing the varied media and studio assets that will have to be consolidated is going to be a challenging undertaking for the buyer, as old corporate cultures and business practices clash with other types of media businesses. Disney and Comcast have little, if any, experience in the new digital streaming direct-to-viewer subscription business.
An additional challenge for the legacy media companies is the streaming media environment is not static, but constantly changing.
In order to compete successfully in the new digital streaming environment, old legacy media businesses will have to respond quickly to changing media consumption habits. Fifteen years ago, few contemplated a DVD mail-order business would be at the forefront of an industy-altering method for delivering content over the internet. Much of the legacy media were slow to capitalize on this new and unforeseen entertainment trend, as they continued to conduct business as usual. That is one of the reasons they are far behind Netflix (NFLX, Financial) and have been forced to play an expensive game of catch-up.
Additionally, the environment in which traditional entertainment conglomerates and studios will be doing business will become ferociously competitive as other players with muscle, such as the newly merged AT&T-Time Warner colossus enter the fray.
Due to the number of new players vying for a piece of the digital streaming business dominated by Netflix, long-term loyalty of any subscriber base will depend on content delivered for the monthly fee. That means the new companies will not be able to entirely fund the tremendous cost of providing original content solely through price increases.
If either Disney or Fox’s projections about the future prove to be erroneous, e.g., the rate at which consumers engage in of cord-cutting, they could find themselves under financial strain.
The difficulty for the victor in the Comcast-Disney bidding war is their principal competitor is far ahead of them in terms of a consistently providing a varied menu of content on a regular basis. Viewers' appetite for content is voracious, no doubt due to the increasing number of original productions now being offered by Netflix.
In the future, any subscription price increases will have to be justified by even more and varied original content as Comcast, AT&T (T, Financial) and Disney will be nipping at Netflix's heels.
The buyer of Fox's studios will have little margin of safety in implementing its strategic business plans for conversion of its existing consumer entertainment business into a digital media direct-to-consumer provider.
The old ways of doing business will need to be discarded. Any media conglomerate that plans to compete successfully in the new digital content environment is going to have to be nimble, so it can quickly respond to the changing habits of fickle viewers.
Disclosure: I have no positions in any of the securities referenced in this article.
