Disney’s new $38 offer for Fox assets was stronger than what most sell-side expected and will be difficult for Comcast to beat. I do not believe that Comcast can raise its bid to above $42 in an all-cash deal (implies levering to 5x, would be difficult to de-lever to below 3x in the following 5-year period). Even at $42, it may not be a large enough premium to overcome Fox Board’s obvious preference to maintain an equity stake in the pro-forma Fox+Disney company. Fox has already announced that they have entered into an amended and restated merger agreement with Disney, and Bloomberg reported that the Justice Department can clear the deal in less than 2 weeks. Disney will likely be the winner. Comcast stock should consequently rally towards $40, which is essentially where the stock was trading at before its CEO announced that he would outbid Disney if the AT&T/Time Warner deal is approved (On a NTM basis, CMCSA trades at ~8x EBITDA and was acquiring FOXA for ~12x, the deal was crazy dilutive on paper, investors did not like it, so the stock has declined from $40 to $33 today).
Can Comcast make a cash+stock offer?
Yes, Comcast can add stock to its existing $35/sh cash offer, essentially adding a $10B equity component. This would be a 80/20 cash/stock offer but it will still be dilutive and shareholders will react poorly towards it (pressure on management to withdraw).
More importantly, Fox has shown a strong preference to be acquire by Disney. In today’s press release, Rupert Murdoch said “We remain convinced that the combination of 21CF’s iconic assets, brands, and franchises with Disney’s will create one of the greatest, most innovative companies in the world.” The Murdochs do notwant any tax liabilities and Disney’s superior stock+cash offer solves their tax problem.
The 0.1%-odds-case that Comcast still bids
As an independent Board, Fox will have to consider Comcast’s bid in their analysis of choosing an acquirer. There’re 12 people on the Fox Board but I count at least 7-8 as Murdochs’ votes.
- 3 are Murdochs.
- Chase Carey is former COO and Vice Chair of Fox, highly likely a Murdochs vote.
- Roderick Eddington is Australian, long history with News Corp (which was founded by Rupert Murdoch) and been on Board since 1999, so he will likely vote with the Murdochs.
- Delphine Arnault, daughter of Bernard Arnault. Bernard attended his first state dinner along with the Murdochs (appears to be Trump guy). 27% of investors voted against her re-election to the Board last year, likely means she’s not truly independent. Another Murdochs vote.
- David Devoe, former CFO of Fox for 23 years. 100% Murdochs vote.
- Jacques Nasser, former CEO of Ford, also on the board of Sky (which Fox owns 39%). Likely a connection with the Murdochs so probably vote along them.
- The real independent Board members (these guys will vote on whoever that has the higher bid): Viet Dinh, lawyer and former AG assistant. Jeffreyy Ubben, finance guy from ValueAct Capital. Tidjane Thiam, CEO of Credit Suisse. James Breyer, another finance guy from Breyer Capital, also worked at Blackstone previously.
You can see that the Murdochs have effective control of the Board and they will do anything to do a tax-effect deal (AKA the Disney deal). Even if Comcast levers up to 5x and bids a crazy amount, I expect the Fox board to come out and claim that the long-term value of pro-forma Disney is still worth more than Comcast.
For long-term holders, buy CMCSA stock. Shares currently trade at 7.3x NTM EBITDA vs. 2-year low of 7.0x and 2-year high of 8.8x. On EPS basis, CMCSA is trading near historical lows, close to 3x standard deviation.
For option plays, buy CMCSA 7/20 $34 calls to play the 7/10 Fox Board meeting event. They have relatively lower IV compared to the other expiration and $34 is fairly close to being ITM. The 7/20 $34 calls are currently $0.72 each, if CMCSA moves up to $35 within the next 7 days, options will be worth $1.46. If CMCSA trades up to $36 within the next 20 days, options will be worth $2.1.
If you want to be safe, buy a little first and wait and see if CMCSA makes a bid. Alternatively, just buy an option with a further expiration. You can play this however you want, but I see a very favorable risk/reward for CMCSA at the current level.
Disclaimer: Consult your financial professional before making any investment decision.
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