Sky May Not Be Crucial for Disney -- WSJ

By Erich Schwartzel and Ben Fritz 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 19, 2018).

LOS ANGELES -- Walt Disney Co. Chief Executive Robert Iger has called Sky PLC a crown jewel of his $71 billion pursuit of 21st Century Fox Inc. assets. Now, as he decides how hard to fight for it, some on Wall Street are arguing that the European television company isn't key to Disney's future.

As part of his proposed takeover of most of Fox, Mr. Iger has the chance to immediately boost his company's international presence and new direct-to-consumer strategy by gaining ownership of Sky. Fox currently has a 39% stake in the European satellite company and internet provider and is bidding for the rest.

But Sky has also been targeted by Comcast Corp., which currently has the lead with a bid valuing Sky at $34 billion, 5% higher than Fox's most-recent offer.

A Fox takeover of Sky would essentially be done on behalf of Disney, presuming its agreement to buy Rupert Murdoch's media empire goes through and isn't topped by Comcast.

Some analysts on Wall Street say Sky, which was already in Fox's sights before the bidding war, isn't integral to Disney's future in streaming. Stepping back in favor of Comcast also offers Disney a chance reduce the debt load of its planned $71 billion acquisition of Fox.

"It's a nice-to-have, but not a must-have," said B. Riley FBR analyst Barton Crockett of Disney acquiring Sky. "Most investors I talk to would be happier if they just walked."

Fox and Wall Street Journal parent News Corp share common ownership.

Disney and Fox still could come back and top Comcast's offer for Sky, either because winning the bidding war could be advantageous for tax reasons or to save face in what has become a fierce battle between the company behind Mickey Mouse and the cable giant for media assets on both sides of the Atlantic.

Numerous analysts and media executives have speculated Disney could "split the baby" with Comcast and, in partnership with Fox, cede Sky to the cable company. Based on how the Sky auction plays out, Comcast could decide to drop its pursuit of Fox's assets, according to people familiar with the matter.

The two companies are prohibited from directly discussing such a deal, a person familiar with the matter said. Though a counteroffer for Sky would officially come from Fox, Disney has the power to veto such a move by blocking increased debt financing that would be needed, the companies said in regulatory filings Friday.

Fox could raise its bid for Sky at any point. But if it makes a move, it may wait until after a shareholder vote on its sale to Disney scheduled for July 27, so both companies have certainty about what would happen to the 39% stake.

As a satellite television service reaching about 23 million customers across five European countries, Sky would give Disney a head start in Mr. Iger's goal of transforming a traditional media company into one that distributes content it produces directly to consumers, in the mold of Netflix Inc.

Founded as a satellite TV provider in 1989, Sky has since grown to offer phone and internet service and produce original content.

As part of the Fox acquisition, Disney would acquire valuable franchises such as "Avatar" and "The Simpsons" that it could incorporate into its movie, consumer products and theme-park businesses. That library of titles is also seen as essential to the company's plans for streaming services.

Disney plans to launch a family targeted movie and TV streaming service in late 2019, complementing an ESPN-branded sports service that recently went live. If the Fox deal goes through, Disney would also assume majority control of Hulu, giving it a third digital offering, which it would populate with more adult content, the company has said.

Disney could use Sky's broadband internet offering to help launch the three streaming services in Europe. Sky has already announced plans to offer Netflix to its subscribers as part of an entertainment package.

Without Sky, Disney would have to launch its streaming services in Europe from scratch, which Mr. Iger has indicated he is prepared to do. The company doesn't have a strong record in digital businesses, though, with unsuccessful attempts to move into videogames and short-form online video, as well as a more limited video service in the U.K. called DisneyLife that has attracted few subscribers.

Mr. Iger has said another benefit of buying Sky and other Fox assets would be making his company more global.

In the fiscal year ended last October, Disney's revenue from all countries besides the U.S. and Canada was 24% of its $55.1 billion total.

On a conference call with analysts in December, Mr. Iger said that if Disney acquired Fox and all of Sky, the share of foreign revenue would jump to 40%.

Beyond Sky's strategic significance, financial considerations cut both ways.

If Disney were to acquire Fox and then sell its new minority stake in Sky to Comcast, it could reduce its cash outlay in the cash-and-stock $71 billion deal by $13 billion, Mr. Crockett said.

However, for tax advantages and the company's low cost of debt, Disney has more to gain from topping Comcast's current bid for Sky than selling the 39% stake, analysts at MoffettNathanson said in a recent report.

"From a strategic standpoint, we believe that the Sky assets are not as necessary for Disney in their path forward," the analysts wrote. However, they added, "the deal math suggests that the battle for Sky will continue moving higher."

--Shalini Ramachandran contributed to this article.

Write to Erich Schwartzel at [e-mail] and Ben Fritz at [e-mail]

(END) Dow Jones Newswires

July 19, 2018 02:47 ET (06:47 GMT)

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