LONDON (Reuters Breakingviews) - Comcast has overreached in its pursuit of Sky. The U.S. cable giant prevailed over Twenty-First Century Fox on Saturday, winning a dramatic one-day auction with an offer that values the UK broadcaster at 30.6 billion pounds ($40 billion). For Chief Executive Brian Roberts, it’s a huge bet on overseas growth for a company that cannot get much larger at home.
The shoot-out marked the climax of Comcast’s audacious seven-month attempt to snatch Sky from founder Rupert Murdoch’s Fox - which owns 39 percent of the UK company - and Walt Disney, which is buying the media mogul’s U.S. entertainment assets. Comcast’s offer values Sky shares at 17.28 pounds each. That’s 17 percent more than the U.S. group had previously offered, and a staggering 61 percent premium to the 10.75 pounds per share that Fox first proposed in December 2016. Comcast is also paying almost 3 billion pounds more for Sky than Fox and Disney’s best and final offer.
That comfortable margin should ensure Sky investors rush to sell or tender their shares, giving the cable group the 50 percent plus one share it needs to succeed. It also increases the chances that Fox and Disney will cash in their 12 billion pound stake rather than using it as a bargaining chip in future deals.
However, Roberts will struggle to justify the deal on any conventional valuation metric. Including debt, the offer values Sky at more than 15 times its EBITDA for the year to June 2018, almost twice the multiple that investors attach to the Philadelphia-based group. Comcast reckons it can add about 400 million pounds a year to Sky’s bottom line through a combination of cutting costs and boosting revenue. Even factoring in these benefits, though, Comcast’s investment will earn a return of little more than 5 percent after tax by 2020, Breakingviews calculates. That is well below Sky’s cost of capital.
The $174 billion company will doubtless point to past deals, such as its 2011 takeover of NBC Universal, as evidence that it can make a success of acquisitions that look expensive at the time. Recent consolidation also underscores the scarcity of media assets: witness Disney’s enthusiastic pursuit of Fox’s businesses. Sky will give Comcast greater international clout as it squares up to new media giants such as Netflix. Even if Roberts is ultimately proved right, however, it will take years for him to dispel the suspicion that he has reached too high for Sky.
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