Comcast on top after auction for control of Sky concludes with £30 billion offer

Comcast has outbid Fox in a rare sealed auction to set itself up to win full control of Sky. 

Comcast finally offered £17.28 per share, against Fox’s £15.67.  This is a dramatic milestone in what has become one of the most complex battles for corporate control in my two decades of practice as a corporate lawyer. 

The issue of who would take full control of Sky has been long-fought, contested and controversial.  It continues to be a conquest between media giants that has played out in the media, as well as before the regulators. 

Fox already has a 39% interest in Sky.  The Murdoch group has attempted to gain control of the remaining 61% on two memorable occasions. The first back in 2011 was jettisoned amid the phone hacking scandal.  UK regulators and Sky shareholders did not have an opportunity to decide definitely on the deal.  The most recent attempt began with Fox’s £10.75 per share offer in December 2016.  Although the transaction was cleared on antitrust grounds following a review by the European Commission, it met with UK public interest concerns that complete control by Fox would threaten media plurality.  The deal only received conditional approval in July this year, with Fox committing to Sky News’ editorial independence and maintain £100 million in investment over 15 years.

Meanwhile, Disney has agreed to acquire the Fox entertainment assets – which include Fox’s stake in Sky.  The transaction awaits full regulatory approvals but is expected to close next year.

These developments reached a high-water mark over the weekend in an unusual bidding procedure as neither Fox nor Comcast had put in what they declared to be a final offer.  The auction was overseen by the UK Takeover Panel and was structured around three rounds of sealed bidding before the winner emerged. Such procedures are not uncommon in private M&A.  They are unusual in the case of a UK public company and Sky is probably the most-high profile of the five targets to date.  Other examples have included Enodis, steel-maker Corus, Canary Wharf property group and online retailer, QXL.  They are eclipsed by the £30 billion bid for Sky.

It might be asked whether Comcast has bid too high, but Sky has been described as a “unique asset” and a “jewel in the crown”.  Critics might say that blind bidding and sudden death procedures fuel over-valuation. The point has been raised by Tata reflecting on its own experience on its acquisition of Corus where it paid £6.7 billion in an auction.

Undeniably, there is a substantial difference in the Comcast and Fox final bids but there are questions of strategy, Boardroom egos and financial headroom to consider.

For Comcast there is much to play for.  It has lost out to Disney over the Fox entertainment assets.  It is the biggest cable operator in the USA and includes NBC Universal in its corporate stable.  Yet Comcast faces declining North American subscriber shares and competitive threats from streaming services such as Netflix and Amazon.  Sky is not just a satellite TV service but has a diversified offering including the Now TV streaming service, broadband internet and mobile.  Sky presents clear complementarities and opportunities for vertical integration across the media value chain from content into distribution and cross-media.  Sky offers an opportunity for geographic reach and diversification, adding some 23 million customers in key European markets such as the UK, Ireland, Germany, Austria and Italy without having to grow these organically.  Then factor in Sky’s premium sports rights, and a brand, business model and product that has reportedly won the respect of Comcast senior management, it is not difficult to see why this deal matters to the US group. 

Disney has seen the value of its conditional interest in Sky increase dramatically as the corporate tussles have ensued.  The Disney-Fox side already has a 39% stake which gives a level of influence and ability, at least in principle, to hold the status quo.  That it is not to say that it does not want to own Sky outright, but other factors come into play.

In short, Comcast really had to come in with a knockout bid to give it the best prospects of emerging on top.  Deal insiders say that it had to raise its offer substantially above that of Disney-Fox to be sufficiently alluring to those shareholders who would be likely to go with the latter based on their existing interest.

This is not quite the end of the process.  Sky’s shareholders have until 11 October to decide which formal offer to accept. Comcast says that it expects to conclude by the end of October.  Since that bid has been recommended by the Sky Board, it seems on track to do so.  Disney will be considering its position on its interest in Sky.

What will this mean for Sky customers? They are probably unlikely to see any immediate change.  Only time will tell.  Comcast has had to dig deep to fund its offer.  It will understandably be looking at creating synergies and cutting costs  Where those savings will come from and the extent to which they will be passed on to customers is not entirely clear.  Whoever ultimately controls Sky will not want to kill off the golden goose by alienating its growing pool of customers through higher prices and less choice.  It will need to continue to invest in quality services and features, including premium sports content, which is arguably one of its most prized assets.