For the last year, a heated ownership battle has been unfolding between Comcast and 20th Century Fox in their contest to acquire Sky PLC. Sky is Europe’s leading media company and the largest pay-TV broadcaster in the UK, with over 21 million subscribers and 30,000 employees (not to mention a mercilessly dominant professional cycling club). While many such battles are settled outside of the public eye, this one is destined for a different fate: Over the next two days, the Comcast/Fox contest will culminate in an old-school auction—one ordered by the UK Takeover Panel, which oversees and regulates all public takeover activity in the UK. The dynamics of this auction will prove interesting to anyone curious about company valuation and sales-process design.
First, a little backstory. Fox has long held an ownership stake in Sky, and it currently controls a sizeable 39 percent slice of the company’s equity. In December 2016, Fox made a public offer of intent to purchase the remainder of Sky’s outstanding shares at £10.75 (approximately $14.22) per share. Its pending offer, however, was hamstrung by regulatory and political delays, some owing to a long-tendentious relationship between UK regulators and Rupert Murdoch—who, at the time, was perched at the helm of the entire Fox empire. In turn, these regulatory delays created daylight for two additional developments. First, while its Sky offer was pending, Fox itself agreed to be acquired by Disney, with Murdoch’s news division (along with Murdoch) to be spun off as a separate entity, and with Disney inheriting most of the rest (including Fox’s outstanding bid for Sky). Second, the US telecommunications behemoth Comcast, itself seeking to expand globally and sensing a strategic opportunity, made a surprise offer for Sky in February, valued at £12.50 a share. (Incidentally, Comcast also made an offer to purchase Fox, which was declined by Fox’s board, citing antitrust concerns.) Several volleys of competing bids ensued, with Comcast making the most recent offer on July 13, 2018, for £14.75 ($19.49) a share, just edging out Fox’s active bid (made on the same day) of £14 a share. Pursuant to its regulatory authority under Rule 32.5 of the Takeover Code, the Takeover Panel has now undertaken the rare step of ordering that an auction (commencing September 21) will settle the matter.
For those interested in auction design, this one has some intriguing features. According to the Takeover Panel’s public announcement, the auction will be run in three stages. In the first stage, the current low bidder (which as of this writing is Fox) may make its own new bid for Sky. In the second stage, the current high bidder (Comcast) can respond with its own competing bid. Should these two stages not determine a winner (e.g., if Comcast chooses simply to match Fox’s opening bid), the auction proceeds to a third and final stage, where both parties will simultaneously submit bids to the Takeover Panel, in a winner-take-all, sealed-bid process. All bids must be in cash, with no added conditions permitted and no minimal bidding increment.
The fact that the auction begins in sequential fashion, with one party bidding first, followed by the other, makes the process look (at least initially) like a right-of-first-refusal mechanism. With a right of first refusal, when a competing buyer makes a bid, the right holder, after observing the competitor’s bid, gets to decide whether to match the bid (and purchase the asset) or decline. This sequence gives the second bidder—which appears to be Comcast—significant leverage to dictate the fate of the auction. It can outbid Fox and end the auction immediately, or it can match Fox and proceed to the bonus round of sealed bids.
So what ammunition does Fox have? Plenty, it turns out. Another aspect of the auction that bears noticing is the significant “toe-hold” Fox enjoys in the bidding contest. Because Fox already owns about 39 percent of the outstanding stock of Sky, its winning bid obliges it to make good on only the remaining 61 percent (effectively paying the other 39 percent to itself). Not only does a toe-hold of this size reduce the cost of making a winning bid, but it softens the blow even if that bid fails. For if Comcast wins the auction, Fox will ring up a substantial return on its 39 percent stake. As a robust literature in economics has shown, this incentive structure means that Fox can afford to be significantly more aggressive in the auction process. In addition, although Comcast and Fox have no doubt both been involved in due diligence during the bidding war, Fox’s longstanding ownership stake almost certainly has made it privy to significant proprietary information about Sky—information that Comcast would have to piece together during the due diligence process (if at all) in forming its bid.
Yet another factor favoring Fox is that it is playing with house money—or perhaps we should say “Mouse money.” Under the terms of its acquisition deal with Disney, Fox shareholders are entitled to receive Disney stock based on a stated exchange ratio (subject to some modest adjustments), regardless of whether Fox is successful in closing out ownership of Sky. If Fox wins, the Disney-Fox transaction still goes off largely unaffected: Fox will effectively be able to simply “resell” Sky stock to Disney based substantially on the previously set terms of exchange. The fact that Fox can pass along its bidding costs to Disney adds yet another intriguing twist to the drama, and seemingly another advantage to Fox.
Although it is unfolding thousands of miles across the Atlantic, the shotgun economic jousting match between Comcast and Fox is sure to become a case study for countless law and finance courses on both sides of the pond. Let the gaveling begin!
This post comes to us from Professor Albert Choi at the University of Virginia Law School and Professor Eric Talley at the Millstein Center for Global Markets and Corporate Ownership at Columbia Law School.