Comcast, Disney in multi-billion dollar bidding war for Fox assets

Comcast on Wednesday bid roughly $65 billion to buy parts of 21st Century Fox, setting off a bidding war with Disney for control of the target's studios, sports networks, cable TV networks and other premium assets. But the most prized asset of all is Fox's stake in Hulu, the video-streaming service seen as a potential rival to industry leader Netflix (NFLX).

"Hulu is the crown jewel in the battle royale for the Fox assets," said Daniel Ives, chief strategy officer and head of technology research for GBH Insights. "These assets would fit like a glove for both Disney and Comcast."

Hulu is currently jointly controlled by Disney, Fox, and Comcast which each own a 30 percent share. Fox is planning to unload its stake along with other entertainment assets as its controlling shareholder, Rupert Murdoch, restructures the company. Both Disney and Comcast are interested in the Fox properties. Time Warner also owns a 10 percent stake in Hulu.

Comcast would also buy the 20th Century Fox studios, its regional sports networks, and the F/X and National Geographic cable-TV channels. 

Fox acknowledged in a news release that it received Comcast's offer and said its board, attorneys and financial advisers will review it. No decision has been made on whether to delay a scheduled July 10 shareholder vote on Disney's offer.

Disney couldn't immediately be reached for comment.    

Superior bid?

In a letter addressed to Rupert Murdoch, Lachlan Murdoch and James Murdoch, who run 21st Century Fox (FOX), Comcast said its $35 a share, all-cash offer provides "superior and more certain value" compared with Disney's $52 billion all-stock bid.  

Comcast (CMCSA) and Disney (DIS) are eager to build their streaming businesses to counter the rise of Netflix and the growing numbers of cord-cutters who quit cable and satellite TV. Hulu has 20 million subscribers, making it the third-largest streaming service behind Netflix and Amazon. The service reportedly lost $917 million last year even as it generated more than $1 billion in ad revenue.

Sill, Hulu would give Comast and Disney's streaming business a needed boost.

Comcast's foray into the streaming space, called Watchable, shut down last year after failing to gain traction with viewers. Under Iger's leadership, Disney has made streaming a priority. Disney is planning on launching its own streaming service next year that will feature family-oriented content and has already launched a sports service for its ESPN all-sports cable network.

Competing against Netflix, however, won't be easy.  For one thing, the service has 140 million members, orders of magnitude larger than the 20 million Hulu subscribers.  Netflix has also spent billions in recent years developing original content such as "BoJack Horseman",  "Orange is the New Black" and "Arrested Development."

Comcast has also offered to buy the 61 percent of U.K.-based Pay TV provider Sky for $31 billion that 21st Century Fox doesn't already own. That's roughly $4.2 billion more than Fox's existing offer for Sky. The acquisition prices are expected to rise as competition heats up between the media giants.

"Must-win" for Comcast?

According to Dealogic, Comcast's offer for the Fox properties would be the second-largest ever deal in the media sector, trailing only AOL's merger with Time Warner in 2000, which was valued at $94.3 billion excluding debt. It also tops this year's $85 billion acquisition of Time Warner by AT&T, which won a significant legal victory yesterday when a federal court rejected the government's claim that the deal would harm consumers.

"As for Disney, this legal outcome was probably the least attractive as it will likely lead to an aggressive counter-bid from Comcast and an absence of heightened regulatory concern from the (21st Century Fox) board," writes Michael Nathanson, an analyst with MoffettNathanson, in a note to clients today.  "The question is will Disney's board and management will go to the mat on this transaction. We think the answer' is 'yes.'"

According to an analysis by GBH analyst Daniel Ives, a combination of Disney and Fox would control 35 percent to 40 percent of the domestic box office. It would generate roughly $2 billion in cost savings in the first 12 to 18 months after the transaction closes.

BTIG analyst Richard Greenfield argues that Comcast views the Fox and Sky deals as a "must-win" noting in a recent client note that "if Disney succeeds in the purchase of both companies, Comcast is unlikely to ever be able to catch-up or even draw close to Disney's dramatically enlarged global footprint." Comcast is willing to take a risk to make the deal happen.

Old school v. new school media

If it buys the Fox and Sky assets, Comcast's consolidated debt would more than double from $65 billion to $164 billion, a figure that Moody's has called "staggering. Moody's placed Comcast's debt ratings on review for a possible downgrade. Comcast, though, is in no danger of losing its investment grade rating on its debt.

In the wake of yesterday's court decision approving the AT&T-Time Warner deal, many observers are expecting a wave of consolidation in the media and entertainment sector.

Mario Gabelli, the billionaire chairman and chief executive officer of GAMCO Investors, who has followed the media sector for decades, likened the ruling to a gong being struck.

"You are basically taking old-school media competing against the new behemoths -- the Amazons, the Apples. " he said in an interview.