Rationale behind Comcast's acquisition of Sky remains a mystery' says analyst

30/06/2020

Analyst Craig Moffett said he is still not convinced of Skys financial and strategic value to Comcast

By Jenny Priestley

Published: June 30, 2020

Analyst Craig Moffett said he is still not convinced of Sky's financial and strategic value to Comcast

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Leading media analyst Craig Moffett has said he still doesn't understand why Comcast spent $40 billion on acquiring Sky.

In a note to investors, the MoffettNathanson analyst said he is still not convinced of the deal's financial and strategic value to Comcast.

The rationale for its place in the Comcast portfolio remains a mystery, said Moffett in a note to investors. Given everything going on in traditional media, we think the burden of proof remains on Comcast to prove the value of Sky.

Comcast beat Disney to acquire Sky in September 2018, eventually paying $48 billion (total enterprise value) for the broadcaster. According to Moffett that figure was 16 times enterprise value to earnings before interest, taxes, depreciation and amortisation (EBITDA) multiple that represented a near tripling from the roughly six times multiple at which the shares had been trading just a year before.

In dollar terms, the business is, by our estimate, worth something like $10.5 billion today. With the cash Sky has generated for Comcast since the acquisition, the total value since deal rises to just under $12 billion, added Moffett.

Net of the free cash generated since the acquisition, that $36 billion of value destruction in such a short period amounts to nearly $8 per share.

Moffett stated that Sky is running well, but it remains a legacy media business, and has been strongly impacted by the coronavirus pandemic due to both the cancellation of live sports events and the UK advertising market utterly imploding. He did go on to note that as football returns in both Germany and the UK, it's easier to control getting that revenue stream back online.

These COVID-related pressures have exacerbated, and accelerated, the longer-term secular concerns that we and so many others had even when the deal was first announced, continued Moffett. Sure, there are some important differences between the UK and US pay-TV markets. But video is being fundamentally disrupted by Netflix and Amazon and a growing ensemble of well-funded, direct-to-consumer focused SVoD entrants globally.

The fact that Sky was then, and remains today, a well-run asset, was actually a negative, not a positive, as it left little room for obvious improvements, he added.

What remains more than anything else is the open question of strategy for Sky, Moffett concluded. What did they originally intend to do with it when they bought it and what do they intend to do with it now? It is hard to imagine that they bought it at the price they ultimately paid simply because they thought it was a better business than the market thought it was. Did they ever plan the pivot to a pan-European, or global, even, OTT service? If they did, do they still? If not, what changed?

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