Comcast Overpays for Sky

The bidding war for Sky is coming to an end. With neither Comcast (CMCSA) or Fox (FOX) making a qualifying bid, the UK takeover panel exercised its rights to bid for a final auction. The auction took place on Saturday, Sept. 22, with Comcast offering 1728 GBX per share, 10% more than Fox's GBX 1567 bid. Both offers were significantly higher than their previous offers of GBX 1476 and GBX 1400, respectively. The offers are excellent for Sky's shareholders, but we believe Comcast will struggle to generate a decent return on its investments as we already believe that previous offers exceeded Sky's fair value.

Comcast bid increase adds £ 4.4bn ($ 5.7bn) to purchase price over previous bid, bringing total offering to £ 30.6bn ($ 40.0bn) ). This additional payment represents only 3.3% of Comcast's market capitalization. In addition, if we assume that Comcast is 40% overpaid for Sky's shares, the value for the lost shareholder would be approximately $ 2.50 per share. So, while we think Comcast was swept away in the auction, it will not be too detrimental to our estimate of Comcast's fair value. We also maintain our wide margin rate on the firm. On the other hand, we are increasing our estimate of Sky's fair value to GBX 1728's bid price for Comcast and we are maintaining its narrow margin index.

Sky's shareholders now have until October 11 to vote for one or other of these offers. However, with Comcast's offer more than 10% higher than Fox's, we believe Comcast's offer will be good even though Fox already owns 39% of Sky's stock. With such an offer and knowing that it will lose control anyway, Fox and Disney may choose to bid on Fox-owned shares, which Disney will soon take over. Once the vote is over, we expect a quick conclusion of the agreement. Although very unlikely, in our opinion, if less than 50% of Sky's shareholders (approximately 82% of non-Fox shareholders) bid, the transaction could still fall. 1260.

Allan C. Nichols, CFA does not hold any shares in any of the above mentioned securities. Check out the editorial rules of Morningstar.