Over the weekend, telecom giant Comcast Corp. CMCSA outbid Twenty-First Century Fox FOX in a one-day auction process to acquire a 61% majority stake in U.K.-based Sky PLC LSE:SKY, the largest pay-TV operator in the region.
While Comcast said it has obtained around 30% of the company’s shares so far, it has until Oct. 11 to buy at least a 50% stake for the deal to go through. While Fox already owns 39%, the company's independent committee favored Comcast since “the price of [its] offer is materially superior."
The acquisition of Sky lets Comcast foray into the European markets, something the company has been eyeing for a long time now. Moreover, after the U.S. telecom major failed to outbid Walt Disney Co. DIS for Fox's assets earlier this year, Comcast’s cash flow was in a better position. The franchise is also highly profitable and possesses the right to air English Premier League matches, along with boxing, Formula 1 racing, golf and darts, attracting massive audience views.
Comcast is now expected to reproduce its American content and distribution model in Europe, thus significantly contributing to growth. When the acquisition of Sky is finalized, it will not just have a presence in the U.K., but also in Germany, Austria, Italy and Ireland. The deal is expected to close sometime next year.
Several analysts are predicting Fox will sell its 39% stake in Sky to Comcast, basing it off a prior agreement where Comcast sold its stake in streaming network Hulu to Disney. This is primarily because Comcast doesn’t believe it can run Hulu the way it wants if Disney owns 60% of the network (30% owned by Disney and 30% owned by Fox).
From a value-add perspective, Sky brings strategic value to the table. The nearly 23 million customers across Europe massively adds to the 29 million customers Comcast has in the U.S. Moreover, Sky’s streaming segment, NowTV, could help the Comcast-Sky collaboration to build a strong Netflix-style NFLX subscription brand in this part of the world, another potential outcome analysts are betting on.
While the Sky deal is going to massively add to Comcast’s debt profile, which already stands at around $65.8 billion, rating agencies don’t seem too concerned about the recent state of events. Moody’s affirmed the company’s A3 credit rating with a stable outlook, on the future potential to be uncovered from the deal.
Coming to valuation, Comcast seems to be a fairly undervalued bet, given current numbers. It has a price-earnings ratio of 7.08, compared to the industry median of 19.33. Moreover, it floats a forward price-earnings ratio of 12.77 compared with the industry median of 19.53.
From a profitability perspective, Comcast has an operating margin of 21.23%, compared with the industry median of 10.31%. GuruFocus ranked its profitability and growth 8 out of 10.
Despite the immediate negative reaction and subsequent 6% decline in Comcast shares, the overall outlook seems to be positive. With the immense potential Sky has, it is now Comcast's job to uncover that value in order to make attractive returns for its shareholders.
Disclosure: I do not own any of the stocks mentioned.
