Comcast Goes Fox Hunting And Shoots Itself


There has been a lot of press about Comcast (NASDAQ: CMCSA) and The Walt Disney Company (NYSE: DIS) and which company will win the bidding war for Twenty-First Century Fox (NASDAQ: FOX). In short, Comcast shareholders should hope their company doesnt win this war, as the result may end up doing more harm than good. The structure of Comcasts deal is arguably better for Fox shareholders, but much worse for the new company.

To Xfinity and beyond

Pardon the bad pun, but the Xfinity name seems to exist in hopes that customers will forget they are still with Comcast. Whether customers love or hate Comcast at this point doesnt seem to matter. The cold hard fact is, its getting easier to cut the cable television cord, but leaving behind Comcasts high-speed Internet is a totally different story.


There are choices available to consumers for Internet service, but not in all locations. In some more populated areas you might be able to choose between Comcast, Verizon (NYSE:VZ), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Fiber, or others. However, for the many customers there is essentially one choice and that is Comcast. This is shown very clearly in the fact that in the companys last quarterly earnings, High-Speed Internet revenue was up 8.2% and total users of 24.2 million increased 1.5% annually.

If we want further proof that the future of Comcasts Cable Communications business is High-Speed Internet, consider that single-product customers grew by 2.9%, double-product customers grew by 0.7%, and triple and quad-product customers declined by 0.4%. Its not hard to read into this that single-product customers are choosing Internet, double-product users are choosing Internet and TV or Internet and Mobile, and the other customers are cutting out what they see as unnecessary services.


Lastly, think about what we all watch. You want to play games on your Xbox, PS4, or Switch, what do you have your Wi-Fi router hooked up to? You want to binge on Netflix, Hulu, or Amazon Prime Video, what do you think is delivering all that bandwidth? You have several devices and you want them all online at the same time chances are you have Internet through your coaxial cable, which for many means Comcast.

Party like its 2020

I know its only 2018, but for Comcast investors they must be salivating at the movie lineup coming in 2020. In the next few years, Universal Studios is slated to release several big movies each year, but 2020 looks like a banner year for the studio. The movie lineups for Universal, Disney, and Fox are likely a key factor in this bidding war so lets take a quick look at whats coming from each company.


Studio

Universal Studios

Disney

20th Century Fox

2018

Jurassic World: Fallen Kingdom, Skyscraper

Avengers: Infinity War, Solo: A Star Wars Story, Incredibles 2, Ralph Breaks the Internet

Deadpool 2

2019

The Voyage of Dr. Dolittle, How to Train Your Dragon: The Hidden World

Captain Marvel, Untitled Avengers Movie, Aladdin, Toy Story 4, Frozen 2, Star Wars: Episode IX


X-Men: Dark Phoenix, Terminator Reboot

2020

Trolls World Tour, Minions 2, The Croods 2, Sing 2, Fast & Furious 9

Mulan, Guardians of the Galaxy Vol. 3, Untitled Marvel Project I, Untitled Marvel Project II

Avatar 3

(Sources: IMDB Universal Studios Disney 20th Century Fox)

Now of course this isnt an exhaustive list, but highlights the strength of Disneys catalog and shows the ramp up in Universal Studios releases. What is noticeable is the lack of depth of proven franchises in the 20th Century Fox stable.


Universal Studios Filmed Entertainment generated just 7% of Comcasts overall revenue, and the theme park revenue added another almost 6%. Disney is tied to its studio and theme park results on a much more substantial level. The companys Studio Entertainment division represented 17% of revenue, and Disneys world-famous parks represented another 34%.

Of course, the Fox deal is about much more than just movies, as either Comcast or Disney would gain a controlling interest in Hulu and billions in television rights as well. That being said, fully 30% of Foxs revenue last quarter was from Filmed Entertainment. The bottom line here is, Universal Studios can do just fine with or without 20th Century Fox. Disney on the other hand needs to constantly have big contributions from its films and connected theme parks.


No guarantees

Ive read several articles, saying that the recently approved AT&T and Time Warner merger means that either Disney or Comcast taking over Fox is a safe bet. That logic just doesnt seem to hold up, and investors need to understand the difference between these transactions.

The AT&T and Time Warner merger shouldnt have come as a surprise as essentially Comcast did the same thing acquiring NBCUniversal years ago. The combination of the delivery system and content creator is a vertical integration and hard for regulators to argue decreases competition.


The combination of Disney and Fox is consolidation in the industry and not a vertical integration. Several Fox channels, ABC, ESPN, and a controlling stake in Hulu, all under one roof eliminates competition. Weve already seen how strong Disneys movie lineup is, how does integrating Foxs movies not reduce competition as well?

Where Comcast is concerned, regulators are likely going to face the same concerns. A Fox tie-up would consolidate the NBC channels, and several Fox channels. The same argument holds true for Hulu, in this scenario Comcast takes a controlling stake. Its difficult to believe these deals dont get heavy scrutiny from regulators if not killed all together.


Comcasts current offer is like a sledgehammer to the balance sheet

Lets assume regulators can get past all of this and they allow a merger to happen. First, Disneys offer structure and income statement, seem to tell us the company can afford the Fox deal more easily than Comcast. Disneys quarterly interest expense of $172 million was a measly 4% of operating income. By comparison, Comcast spent over $770 million on interest, or nearly 17% of operating income. If Comcast takes on $65 billion in debt this percentage is going to jump significantly.

Second, Disneys balance sheet seems to indicate the company can absorb Fox without putting stress on the companys day-to-day operations. Disneys all stock offer means more dividends to pay, but only taking on Foxs current long-term debt net of cash. By this measure, Disney would absorb about $11 billion of net debt from Fox, which would put the new Disneys long-term debt to total assets ratio at about 17%. By comparison, Comcasts offer is all cash, which means a significantly bigger debt pill to swallow. If Comcasts offer goes through, this puts the companys long-term debt to total assets at more than 50%.


Let Disney overpay and walk away

Comcast losing Fox to Disney, or if the deal is killed by regulators, may not be bad news. The stock offers a better than average yield of about 2.3%. According to analysts, the stock sells at a forward P/E ratio of just over 11 with expectations of EPS growth next year of more than 10%.

Cord-cutting gets a lot of press, but the future of Comcast isnt in TV. Comcast licenses mobile service through Verizon and is trying to package mobile with high-speed Internet, to generate more loyalty to the latter. The companys high-speed Internet, business services, and NBCUniversal are the driving forces behind Comcasts revenue and earnings growth.

Not buying Fox and having to deal with the seemingly crushing debt, isnt the worst thing that could happen. Comcast is growing and has sufficient free cash flow to cover the dividend plus share repurchases, with more than a billion dollars left over each quarter. If the Fox deal goes through all of that potentially changes. In short, Comcast should let Disney overpay and walk away.

Disclosure: I am/we are long CMCSA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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