After Comcast Corp. (CMCSA) announced a bid to snatch Sky plc from Twenty-First Century Fox Inc. (FOXA) and Walt Disney Co. (DIS) on Tuesday, investors are apparently anticipating a bidding war for the UK satellite television outfit.
Shares of Sky closed at £13.31 on Tuesday and rose further to £13.48 on Wednesday, well above Action Alerts Plus holding Comcast's offer of £12.50 per share.
"While difficult to call the outcome, bids for Sky from [Comcast and Fox] can go significantly higher if the focus is solely on being [free cash flow] accretive," Jefferies analyst John Janedis wrote in a Tuesday report.
Fox, which owns 39% of Sky, said Tuesday that it "remains committed" to the £10.75 offer for the rest of the satellite television company.
The Sky stake is part of the vast portfolio of Fox film and television assets that Disney is buying for $66 billion.
Sky is more than a throw-in. Disney CEO Bob Eiger described Sky as the "crown jewel" in Fox's portfolio in a December interview with Bloomberg. Janedis suggested that Disney could bid for the 61% stake.
Comcast Chairman and CEO Brian Roberts is also smitten. "We've admired Sky for a long time," he told investors Tuesday, noting that "there is just no comparison" between Sky's set-top box and television platforms and those of U.S. satellite TV companies. Comcast and Sky would have 52 million subscribers, and could leverage their scale to develop new applications and interfaces.
Buying Sky would take Comcast's debt to 3.0 times Ebitda, CFO Michael Cavanagh said in Tuesday's call. "Our strong balance sheet allows for us to take advantage of attractive opportunities like this transaction, and maintaining balance sheet strength will continue to be an important priority," he said, declining to say just how high Comcast would take its debt levels.
While Cavanagh emphasized maintaining a strong balance sheet, Wells Fargo Securities LLC analyst Marci Ryvicker suggested in a Tuesday note that the language was "not strong here" and that the cable operator would be willing to go above 3 times Ebitda to fund a higher offer.
Incidentally, Disney has a similar leverage. Buying Fox without Sky would put its debt at 2.2 times Ebitda, the company said in December, while buying Sky would push it to 2.9 times.
CEO Brian Roberts and Comcast have thrown down with Disney before.
Comcast lodged an unsuccessful hostile bid for Disney in 2004 when Michael Eisner was CEO. Some of the parties that advised Comcast then have ties to the Sky deal.
Davis Polk & Wardwell LLP, which advised Comcast on the hostile bid for Disney and many other transactions, is working with the Philadelphia media company on the bid for Sky.
Editor's note: This article was originally published by The Deal, a sister publication of TheStreet that offers sophisticated insight and analysis on all types of deals, from inception to integration. Click here for a free trial.