Ever since Netflix's meteoric rise jump-started the online-TV revolution, media executives have debated how to respond.
The arguments span whether it's better to own must-see programming or the pipes that deliver it to millions of homes, or whether focusing on a lucrative but shrinking U.S. TV market is preferable to expansion overseas.
The answer, according to Comcast Corp. Chief Executive Officer Brian Roberts, is do both. On Saturday, his company offered about $40 billion for London-based Sky PLC in a knockout bid, topping rival suitor 21st Century Fox Inc. in an auction for the European TV giant.
As the winner in a fierce bidding war, Comcast is poised to almost double its customers. The acquisition would also help Comcast further hedge its bets in a fast-changing business, believing the key to competing with Netflix is to straddle both sides of the business and the Atlantic Ocean.
It's a costly wager -- and one that didn't go over well with investors on Monday. Comcast shares fell 6 percent to $35.63 in New York. Sky shares jumped 8.6 percent. to 90.11.
"This acquisition will allow us to quickly, efficiently and meaningfully increase our customer base," Roberts, 59, said in a statement. With no antitrust issues looming, he aims to complete the acquisition of Sky by the end of next month.
But Roberts' deal remains clouded. For one, Fox could refuse to tender the 39 percent of Sky that it currently owns. That would leave Comcast sharing the company with Fox, which is on track to become part of Walt Disney Co. next year.
The debt Comcast will take on to complete the deal isn't a concern, but the price tag is a worry, said Craig Moffett, an analyst with MoffettNathanson LLC. The bidding war between Disney and Comcast pushed Sky's valuation from eight times earnings before interest, taxes, depreciation and amortization to 15 times, he said.
"It's going to be incredibly hard to justify having paid such a high price," Moffett said on Sunday. "This is an asset that neither Disney nor Comcast investors wanted to win."
Oppenheimer & Co analyst Timothy K. Horan lowered his recommendation on Comcast stock to the equivalent of a hold from a buy, the only downgrade so far from the handful of analysts who have updated their views since the auction. The stock has 20 buy and six hold recommendations.
Since taking over NBCUniversal seven years ago, Comcast has owned both content and distribution. That's helped reduce its risk. Though the company has been hurt by cord cutting -- with thousands of cable-TV customers dropping their subscriptions -- many Netflix converts still need Comcast's Internet connections. And Comcast's NBC generates lucrative fees by selling old episodes of shows to Netflix, Hulu LLC and others.
Sky is essentially Comcast's European twin, and buying the company is a bet that combining two similar businesses could fuel Comcast's financial prospects for years to come.
Comcast, based in Philadelphia, will now deliver TV to about 52 million customers in both the U.S. and European countries including the U.K., Italy and Germany. Comcast currently gets 9 percent of revenue from outside the U.S. After owning Sky, that number will jump to roughly 25 percent.
"This became a critical asset for Comcast," said Paul Sweeney, an analyst at Bloomberg Intelligence. "It's a very bold price."
Sky also has technology. Sky's pay-TV service has a slick interface called the Q box -- a counterpart to Comcast's X1 set-top box. And Sky has in-demand programming. While Comcast owns the broadcast network NBC, home of NBC News, This Is Us, the Olympics and National Football League games, Sky has a large news division, exclusive deals with HBO and Premier League soccer matches.
"We see that this company is very much akin to the businesses we know well here," Comcast Chief Financial Officer Mike Cavanagh said at a conference earlier this year.
Sky was the final prize in a drawn-out battle between Comcast and Disney for the bulk of Rupert Murdoch's media empire. Disney fended off Comcast's attempt to buy the entertainment assets by securing a deal for $71 billion. Now, Comcast is poised to take control of Sky and transform a cable company founded 55 years ago by Ralph Roberts in Tupelo, Miss., into an entertainment behemoth on two continents.
Comcast executives have talked about the potential of selling Sky's content in the U.S. and NBC's programming in Europe, as well as creating original TV shows together. Comcast estimates that owning Sky will create $500 million in synergies and generate enough cash flow to reduce its debt in a timeline that won't hurt its credit rating.
Some analysts, however, viewed Comcast's interest in Sky and Fox as a sign that Comcast didn't like the future prospects of the U.S. cable business and wanted to diversify. Others questioned why Comcast wants what is mostly a satellite-TV business -- a technology that's becoming outdated as consumers get entertainment over the Internet.
Information for this article was contributed by Christopher Palmeri, Matt Townsend and Katie Linsell of Bloomberg News.
Business on 09/25/2018