FOXA Fox Corporation

By Shalini Ramachandran 

Comcast Corp.'s bid for 21st Century Fox hit a setback after the Justice Department said Thursday it would appeal a federal judge's decision to bless a merger of AT&T Inc. and Time Warner Inc.

Comcast had used the earlier ruling to rebut concerns from Fox that its bid would face regulatory risk. AT&T's deal for Time Warner married a company primarily focused on distributing content with one that produced it, just like Comcast's bid for Fox. Comcast made its $65 billion offer for Fox a day after the ruling last month.

The government's appeal of that earlier decision could weaken Comcast's position in the eyes of Fox's board as the cable giant battles with Walt Disney Co. over Fox. Disney followed Comcast by raising its offer to purchase most of Fox's assets to more than $71.3 billion.

Comcast executives believe that the Justice Department is likely to lose its appeal given the strong wording of the prior decision and industry precedents, including Comcast's own 2011 acquisition of NBCUniversal, people familiar with their thinking said. However, the appeal could push Comcast to narrow its focus to one of the main prizes in the Fox chase: European pay-TV operator Sky PLC.

Smead Capital Management, a long-term investor in both Disney and Comcast, believes Disney is likely going to end up as the winner of the Fox assets. "We like the deal for Disney. We liked it for Comcast as well, but we need Comcast to be reasonable and rational in what they pay, " said Tony Scherrer, director of research at Smead.

Other personal dynamics are at play. Fox Executive Chairman Rupert Murdoch and his sons view Comcast with wariness after years of tough dealings with the cable giant and would prefer to own stock in a combined Disney-Fox, The Wall Street Journal has previously reported.

"This is a clear gift to Disney," wrote Craig Moffett, analyst at MoffettNathanson LLC, in a research note Thursday after the Justice Department filed its appeal. "Fox's board has been looking for a justifiable reason to choose Disney over Comcast."

Comcast executives believe their situation is distinct from AT&T's because the phone giant operates nationwide as a wireless carrier and satellite TV provider through DirecTV, while Comcast, though large, still only operates in some regions of the country, the people said.

Fox has put up for sale entertainment properties including its Hollywood movie and TV studio, some cable channels and regional sports networks, as well as a stake in streaming service Hulu. That deal also would include its 39% stake in Sky and other international assets.

Already Disney had a leg up. Last month, the media giant won the Justice Department's approval for its Fox deal on the condition it jettisons Fox's 22 regional sports networks. Some in the Comcast camp were surprised at how fast Disney won regulatory approval for its Fox deal, given that the two compete in similar industries like TV and filmmaking, the people said.

Comcast's advances on Sky could continue to hobble Disney's pursuit of Fox. Earlier this week, Comcast raised its offer for Sky to GBP14.75 per share, valuing the company at $34 billion. That is a 5% premium to an offer Fox, which had been seeking to consolidate ownership, announced earlier Wednesday. It is 18% above Comcast's earlier bid.

The role of the U.K. Takeover Panel, a regulatory body that polices corporate deal making, has created an unusual situation where as Disney and Comcast bid up Fox's assets, the implied value of Sky also rises, forcing the two sides to raise their bids for Sky. Comcast is loath to bid against itself, the people said.

Depending on how the auction for Sky plays out, Comcast could decide to focus its efforts on the European operator and drop its pursuit of Fox's assets, people familiar with the matter said. Back at home, the cable giant hasn't yet topped Disney's latest bid, a sign some Wall Street analysts took to suggest that Comcast is hinting to Disney that it would be willing to split up the assets, taking home Sky and leaving Disney with the other operations.

But BTIG analyst Richard Greenfield in a note earlier this week said Disney and Comcast aren't allowed to talk to each other and a splitting-the-baby scenario may not be in the best interests of Fox and Sky's public shareholders. Moreover, Disney has talked up the value of Sky for its plans to challenge Netflix Inc. globally.

"Honestly, it feels as if Comcast could now come away with nothing, beyond an even more fractured relationship with one of their most important programming partners in Disney," Mr. Greenfield wrote.

Write to Shalini Ramachandran at shalini.ramachandran@wsj.com

(END) Dow Jones Newswires

July 13, 2018 15:45 ET (19:45 GMT)

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