July 12, 2018 / 8:25 PM / 10 months ago

Breakingviews - One number in Fox bid battle just gets smaller

An entrance to Fox Studios is shown in Los Angeles, California, June 13, 2018. REUTERS/Mike Blake

NEW YORK (Reuters Breakingviews) - The price tag for Twenty-First Century Fox assets keeps increasing as Walt Disney and Comcast fight for bits of Rupert Murdoch’s empire. Yet one number just gets smaller: the return on investment for whoever wins.

Disney and Comcast’s dueling bids – and the parallel fight between Fox and Comcast over European pay-TV group Sky, in which Fox owns 39 percent – are being fueled by strategic necessity, ego and a devil-may-care approach to financial logic. Disney’s last offer of $71.3 billion for Fox’s entertainment and international assets is more than a third higher than what it initially agreed to pay last year.

The next step may be that Comcast Chief Executive Brian Roberts raises his offer too. He sweetened his bid for Sky by 18 percent on Wednesday. But Roberts starts on the back foot with Fox. The U.S. Department of Justice on June 27 approved Disney’s transaction so long as it sells Fox’s cluster of regional sports networks, which means the Mouse House can argue its bid is already close to being deliverable.

While the price escalates, what the bidders get stays the same. The Fox assets up for sale could contribute about $5.3 billion of operating profit in 2020, taking Fox’s own estimates and deducting depreciation equivalent to around 2 percent of revenue. Fox’s stake in Sky adds another $1 billion or so.

Then there are synergies, of which Disney is targeting $2 billion annually. Comcast reckons it can cut about the same, aside from any benefits if it snags Sky. Take the sum total of $8.3 billion and tax it at 21 percent, and whoever wins Fox will make back about $6.6 billion a year on their investment.

When Disney boss Bob Iger first offered $52.4 billion plus the assumption of $13.7 billion of debt, that would have meant a return of about 10 percent – higher than Fox’s cost of capital of around 8 percent. Now it’s just under that threshold. If Comcast ups the ante with a higher bid, the return will fall further, destroying value.

Iger and Roberts are both savvy acquirers and have deftly integrated past deals. But whoever loses out will have avoided a heap of integration risk, a mass of debt, and an investment that doesn’t wash its face – while leaving their rival saddled with all three.


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