By: Matein Khalid

Merger mania in global media has been intense since 2017, with Walt Disney's $66 billion bid for 21st Century Fox's television and movie studio assets, Comcast's rival bid for British satellite television platform Sky (39 per cent owned by Rupert Murdoch's Fox media conglomerate). The Justice Department lawsuit against the AT&T-Time Warner merger and CBS' lowball takeover bid for Viacom. Content spending worldwide is estimated at $90 billion in 2018 by RBC Capital Markets, making it imperative for media firms to create global economies of scale. This is all the more true since digital platforms like Netflix and streaming technologies create new paradigms of competition, risks and monetisation. It is now entirely possible that media conglomerates like Disney, Comcast and AT&T-Time Warner will target acquisitions for pure-play content firms globally (Lionsgate?).

Comcast's $31 billion bid for Britain's Sky now raises the prospect of a bidding war with Walt Disney/Fox. Shares of both Disney and Comcast have fallen 12 per cent since the US cable TV operator (and owner of MSNBC, CNBC and Universal Studios) made its takeover bid for Sky on February 27. Of course, the real problem for Comcast is that Fox has a 39 per cent stake in Sky. The fact that Sky trades in London at a premium to Comcast's original offer means that financial markets expect a bidding war or even a Comcast bid for Fox's Hollywood move/studio television assets in the US pledged in its Disney merger agreement. This is the reason the Sky bid has proved so catastrophic for Comcast's share price on Wall Street. This is not surprising since Sky, at 12 times Ebitda, would be hugely dilutive for Comcast. This dilution is all the more ominous since cord-cutting is a major media trend that will hit Comcast more than Disney, despite the Magic Kingdom's ownership of ESPN and now Fox's cable networks (eg, National Geographic).

Comcast trades at 7.4 times projected Ebitda, a valuation range reminiscent of wireless telecoms like Verizon and AT&T. Of course, the real reason I am loath to own Comcast is that the Roberts clan controls 33 per cent in supervoting stock despite owning a mere 1 per cent of the company, making a mockery of the concept of shareholder value optimisation. When founders treat a public company like a family fiefdom (Murdoch? Hearst? Conrad Black? Lord Rothemere?), it is usually best to avoid the stock, period.

Traditional media companies naturally face an existential threat from Google, Facebook, Netflix and even Amazon.com. These are all global media colossi, unlike Comcast, which derives only 9 per cent of its revenues from outside the US.

It is increasingly likely that AT&T will win the Justice Department's antitrust lawsuit against its merger bid with Time Warner in Washington. AT&T's cash and securities offer is worth $104 a share, above Time Warner's share price $96 as I write. The AT&T-Time Warner merger deal could close by July 2018. This means merger arbitrageurs, the proverbial Wall Street arbs, will accumulate Time Warner shares, but the wide deal spread exists because even the Street's top arbs do not have the capital to harpoon a $74 billion megacap media whale.

There is a political dimension to this merger since the Trump White House has accused CNN, a division of Time Warner, as selling 'fake news'. So, the Justice Department will want to demonstrate its political independence and not block this vertical merger at a time when Apple and Amazon have entered the media business. This media deal will close. Warner Brothers is Hollywood's second most profitable movie studio after Walt Disney and with pay TV colossus HBO, contributes 50 per cent of its parent's profits. Time Warner can well rise above $110 a share just on earnings growth alone.

Disney has now offered to buy all of Sky News to help British regulators approve Fox's 11.7 billion bid for its parent Sky. This move will help Fox foil Comcast's takeover bid for the UK pay-TV broadcaster. So, Disney ownership of Sky News would ease regulatory concerns about monopoly power. Rupert Murdoch is political poison in Westminster due to outrage over the 2011 tabloid phone hacking scandal. After all, News Corp also owns the Times, the Sunday Times and the Sun tabloid in London. Yet a bidding ware for Sky between Fox and Comcast remains the most likely scenario to me. Viacom will resist CBS' bid since the board believes it undervalues Showtime and CEO Bob Bakish is not guaranteed the No.2 position in the merged business.