September 24, 2018 / 8:51 PM / 3 months ago

Breakingviews - Comcast $40 bln lunacy gives Disney shot at sanity

People dressed as cartoon characters Mickey and Minnie greet visitors with their latest Year of the Mouse costumes at Hong Kong Disneyland January 21, 2008. REUTERS/Bobby Yip

NEW YORK (Reuters Breakingviews) - It’s been a year of media madness. Comcast’s $40 billion lurch for Sky set a new standard for excess. Walt Disney too paid an extravagant sum for parts of Rupert Murdoch’s empire, including a stake in the UK pay-TV group. Selling it would allow CEO Bob Iger to reduce the Magic Kingdom’s debt or add firepower to battle streaming rivals like Netflix.

In a rare closed-bid auction on Saturday, the U.S. cable firm emerged victorious with its 17.28 pounds-a-share bid, beating Fox’s offer of 15.67. To gain control, Comcast needs Sky investors to hand over at least 51 percent of their shares. But with such a lavish price – more than 100 percent above Sky’s undisturbed price before Fox’s 2016 attempt – the decision is a no brainer.

The moolah is far more valuable to the Mouse House than retaining a minority stake in Sky. Iger had to stretch his original bid for Fox’s assets by some 36 percent to $71 billion after Comcast entered the fray. Half of that is in cash, which will push Disney’s debt to more than three times EBITDA, executives said on a call in June.

Disney’s net debt will rise to about $73 billion, according to a Breakingviews calculation. Selling its stake to Comcast would bring in about $15 billion. Plus, a requirement by U.S. watchdogs to sell Fox’s regional sports networks might bring in another $16 billion, reckons Bernstein analysts. After Disney gives Uncle Sam its share, it could pocket $25 billion.

That money could put Disney’s leverage back in the comfort zone. Based on Bernstein’s 2019 projections, Disney is on track to make around $21 billion in EBITDA next year, adding in cost savings from the deal and backing out Sky and the sports networks. Using Sky proceeds to pay down debt would lower Disney’s ratio to around two times EBITDA.

Or it could take the kitty and invest in its direct-to-consumer streaming video service. Netflix and Amazon are increasing the stakes, spending billions of dollars on TV shows and movies. Disney may be satisfied with its content, but it could always use a technology upgrade. Either way, Comcast’s lunatic spending gives Disney a shot at sanity.

Breakingviews

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