Comcast
and Disney for months have been aggressively seeking to buy up certain Fox
assets. The Disney bid has been accepted by Fox management, but will be decided
when Fox shareholders vote
on the Disney bid on July 27th. Meanwhile, Comcast is making its own
offer for both the Fox assets, and this week it increased its offer for the shares
that Fox does not currently own in Sky, the largest pay TV service in Europe.
The
decision is ultimately up to shareholders, and it appears that antitrust
considerations should not be a determining factor. In my view, the Comcast bid
should not face any significant antitrust obstacles, and if anything should
raise less antitrust concerns than the Disney bid that has already received
antitrust clearance, subject to certain divestiture conditions.
The
Fox
assets in play are most of the company, excluding Fox News and other
key assets. Specifically, Comcast and Disney are bidding for the Twentieth
Century Fox movie and tv studios, the FX channels, the regional Fox sports
channels, Fox’s controlling interest in Sky and National Geographic Partners,
and its non-controlling interest in Hulu, among other assets. Not included in
the transaction are Fox News, Fox Business Network, the sports channels FS1 and
FS2, the Fox Broadcasting Company, and the Fox television stations. Nearly three-fourths of the Fox assets subject
to the acquisition, including the Sky and Star India businesses, are overseas
and thus do not raise any domestic antitrust concerns.
This
analysis is based on the developments in the bidding for the Fox assets and Sky
as of July 12, 2018. Of course, anything can change at any moment, especially
with the July 27th vote quickly approaching.
The Disney Bid
The
Disney bid received clearance
from the Department of Justice in late June under the DOJ’s “FastPass approval”
process. To obtain this expedited approval, Disney promised to divest the 22
Fox regional sports networks in response to DOJ concerns about the horizontal
overlap with ESPN and other sports programming assets currently owned by
Disney. Disney had previously carved out of the deal two national Fox sports
channels, FS1 and FS2.
Notably,
the Disney bid is structured so that it does not require any license transfers
that would trigger a Federal Communications Commission review, so Disney only
needs regulatory consent from DOJ for the transaction. Avoiding the FCC review means
that the transaction is not subject to review under the FCC’s vague “public
interest” standard, which is important for regulatory clearance because the DOJ
review is limited to the economic impact of the transaction.
The DOJ approval for the
Disney bid is somewhat surprising because the approval conditions were limited
to sports channels, but not to the horizontal overlap between the Disney and
Fox production studios. Disney’s studio is the market leader in terms of movie
box office revenues, and Fox studio is one of its leading competitors.
Moreover, the DOJ does
not appear to be concerned about the impact of the proposed merger on Hulu.
Combining the Disney and Fox shares in Hulu would give Disney majority control
over Hulu, the video streaming company that is jointly
owned by Fox, Disney, Comcast and Time Warner. Hulu is an important distribution outlet for
movies, so giving Disney control over Hulu has a post-merger vertical
implication of a Disney transaction. It may be overly optimistic to conclude
that the DOJ learned from its recent failed challenge to the AT&T/Time
Warner merger to not try to challenge the vertical aspects of another merger so
quickly. It should be noted, however, that Hulu is not
profitable and may not be
financially viable as currently structured, and Disney is arguing that giving it majority control would give
Disney the incentive to invest heavily in Hulu so that it will survive.
The Comcast Bid
Comcast evidently is
seeking a similar FastPass approval from DOJ for its bid for the Fox assets.
The Fox board has suggested that the Comcast bid raises more antitrust concerns
than the Disney bid. That may be true in the sense that Disney has received
FastPass approval and Comcast so far has not. But looking strictly at the
economic implications of the Comcast bid, the antitrust concerns if anything
are less for Comcast.
Comcast’s horizontal
overlaps with the Fox assets are similar to those that Disney has. Comcast arguably
may have a more direct overlap in sports programming, but Comcast, like Disney,
has indicated that it is willing to
eliminate the overlap by
divesting any regional sports channels that raise concerns with the DOJ.
Comcast also has a studio overlap with Fox because it owns Universal Studios.
But Universal is much smaller than Disney’s studio, so if DOJ didn’t object to
combining the Disney and Fox studios, it is difficult to see how it could
object to the Comcast studio overlap. And the Hulu issue is largely the same
for Comcast as for Disney—either one would come away with majority control over
Hulu.
Comcast, with its cable
system, may raise more vertical antitrust concerns than Disney if it acquired
the Fox assets. But these are largely
similar vertical concerns to
the ones raised by DOJ in its recent failed challenge to the AT&T/Time
Warner challenge. To the extent that Comcast’s proposed acquisition of Fox’s
assets, akin to the AT&T/Time Warner merger, is largely a vertical merger combining
programming distribution facilities with programming content, there is no
reason to think a court would view the competitive analysis much differently. Moreover, as Judge Leon pointed out in his
ruling in the AT&T/Time Warner case, any vertical antitrust concerns have
to be weighed against the economic benefits of the transaction. In the rapidly
changing communications and media environment, the proposed transaction will
strengthen Comcast's ability to compete with the growing market power of web
giants like Google and Facebook and online powerhouses like Netflix.
Sky and a Possible
Division of Assets
Another possibility is that Comcast and Disney decide to divide
up the Fox assets. Comcast is aggressively pursuing Sky, the largest pay TV
service in Europe. Fox currently
owns 39% of Sky, which is enough to give it managerial control over it, and is
attempting to buy the rest of Sky. If the Fox bid for Sky succeeds and then
Disney buys the Fox assets, Disney would come away with both control and a
large majority of the shares in Sky. But separately from Comcast’s bid for the
Fox assets, Comcast is also bidding against Fox for the shares of Sky that Fox
doesn’t own. The Sky bidding has little direct impact on antitrust review in
the U.S.
A possible resolution of the Disney/Comcast bidding could be
that Disney and Fox let Comcast acquire the non-Fox shares of Sky and then
Disney sells the Fox shares in Sky to Comcast. That way Disney would acquire
most of the U.S. assets in Fox being sold, while Comcast would come away with Sky.
Some
analysts believe this is the best outcome for both companies,
because they would each come away with significant assets while taking on less
debt. One problem with this scenario is that Disney’s bid for the Fox assets
prohibits it from talking directly to Comcast.
Conclusion
Transactions the size of the
Disney or Comcast acquisitions of the Fox assets bear careful scrutiny, and I
am not rendering any final judgments here. But if the Disney proposal can
obtain antitrust clearance with only relatively minor divestitures, there is no
reason to believe that a Comcast bid should face any greater regulatory
obstacles. Thus, the resolution of these bids will likely come
down to what the Fox shareholders choose to do, which should not be affected by
U.S. antitrust considerations.
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