Everybody wants a piece of the Sky (OTCMKTS:SKYAY) pie, but the real question is, is it worth it? Comcast (NASDAQ:CMCSA) argues affirmatively, making its intentions very clear that it wants the European pay-TV powerhouse. But CMCSA stock being what it is, almost any other alternative plan is preferable to Comcast buying Sky.
Reservations about the deal are not unique. No matter what it wants to say about itself, Comcast is a legacy business in a rapidly changing entertainment landscape. Not only that, it’s a debt-laden legacy business. At last count, the media giant had nearly $62 billion of debt on its books. That compares unfavorably to just over $5.2 billion in cash and cash equivalents.
Buying Sky is only going to make this cash-to-debt ratio worse than it already is. Plus, rival Disney (NYSE:DIS) may appreciate Comcast conceding in the race for Twenty-First Century Fox’s (NASDAQ:FOXA) entertainment assets. However, business is war. It’s not giving up Sky without a fight.
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The reason Comcast wants Sky is the exact same one that Disney uses to justify the inevitably rich price tag: international exposure. Sky levers an enviable riches of entertainment and sports channels in the lucrative European TV market. Similar to both suiters, Sky has a production business that is currently focused on original dramas.
Additionally, Sky offers an economical streaming package, as well as a premium streaming service. Naturally, this interests both Comcast and Disney, which must address the cord-cutting phenomenon.
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While buying Sky addresses many “wants” for Comcast, CMCSA stock could suffer from the burden. Shares have lost more than 12% year-to-date. They could lose much more if a deal goes through.
It’s noteworthy that CMCSA stock is up over 12% since Jun. 1. It’d be a shame if management ignored this precious momentum.
CMCSA Stock Needs a Realistic, Manageable Solution
I can speak unemotionally about CMCSA stock because I’m not vested in it. But if I were, I’d imagine I would approach Comcast’s all-in strategy for Sky with severe anxiety. Yes, it would provide extensive international coverage for the media firm, but the deal is like CMCSA buying a European version of itself.
Most critics focus on the acquisition cost, which is a very valid point. But looking closer at the details, I’m not sure how CMCSA stock benefits in the longer term. Simon Murray, principal analyst at London-based Digital TV Research, believes Comcast and Sky offer an easier partnership than a Disney-Sky duo due to shared core business structures (i.e., pay-TV model).
But that’s also the reason why it’s not a favorable partnership from an investment perspective. Streaming companies like Netflix (NASDAQ:NFLX) have increasingly pressured this business model. Eventually, streaming services will overtake the rest of the world. Sky’s declining revenue growth rate relative to historical performances is a huge red flag in this broader context.
Consider too that the post-second quarter earnings boost for CMCSA stock resulted from unexpectedly bigger high-speed internet customer growth. But even this positive surprise is likely a temporary reprieve.
Telecom and satellite-TV giants like Verizon (NYSE:VZ), T-Mobile (NASDAQ:TMUS) and Dish (NASDAQ:DISH) will debut 5G wireless internet services to compete head-to-head with Comcast.
Industry proponents for 5G estimate a 50% U.S. home-market penetration rate by the end of 2020. If successful, that’s going to crush Comcast’s broadband offering. Even worse, advancing technologies allow relative minnows to offer 5G services for a pittance of what typical broadband providers charge.
Comcast needs something else besides its European counterpart to provide substantive, long-term solutions. Beyond that, Comcast can’t afford Sky. The problem, though, is that management thinks it can.
Comcast Has Other Options
At this point, it’s practically useless to talk about alternatives. Comcast is hell-bent on buying Sky. The company lost a high-profile bidding war with Disney over Fox. Apparently, the chief execs at Comcast and Disney have a personal rivalry. All signs point to another protracted battle.
I do want to point out, though, that CMCSA stock is, at least on paper, incredibly undervalued. Shares are trading at seven-times trailing earnings and less than 14-times forward earnings. As research firm MoffettNathanson recently argued, management should consider buying back its shares.
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