Breakingviews: Sky spinoff is Comcast’s least-bad option

Brian Roberts is a buyer rather than a seller. The boss of U.S. media giant Comcast may want to make an exception for Sky. Four years after he won the auction for the European pay-TV provider with a $40 billion bid, the logic of the deal remains fuzzy while consumers are under duress. Spinning off Sky while it’s still in decent shape will shortcut challenges on the horizon.

Including acquired debt, Roberts paid a multiple of 15 times Sky’s EBITDA to clinch the deal, two and a half times the company’s enterprise value before the takeover battle began. That was because he was locked in a complicated bidding war with Walt Disney over entertainment assets owned by Rupert Murdoch’s Fox, while the media mogul was simultaneously trying to buy the rest of Sky that Fox didn’t already own. The financial consequences of Roberts’ determination became apparent in October when Comcast took a non-cash impairment charge of $8.6 billion related to Sky.

Comcast was attracted to Sky’s technology, well-known brand, its strong base in the United Kingdom, and its toehold throughout Europe, including Germany and Italy. Now it’s facing stiff headwinds. Rivals Apple, Amazon.com and Netflix are luring users away from traditional pay-TV providers against a bruising economic backdrop. In the UK, high inflation and variable mortgage rates are weighing on Sky’s subscribers. Average monthly revenue from each of Sky’s 23 million users was $51.25 in the third quarter of 2022, down from $59.50 a year earlier.

Goldman Sachs analysts expect Sky to generate adjusted EBITDA of $2.1 billion in 2023, nearly one-third less than in 2019. Cable operator Liberty Global, French media group Vivendi and British broadcaster ITV trade on an average multiple of 7 times EBITDA, implying Sky is worth little more than $14 billion.

Selling out therefore seems contradictory. Nevertheless, Comcast is considering interest in Sky’s German assets, Reuters reported in November. Another option would be to spin out Sky, perhaps in partnership with a private equity firm, as AT&T did in its $16 billion deal with DirecTV and TPG. That would allow Comcast to retain the benefits of shared technology as a part owner. Back in 2018 Roberts claimed a London cab driver influenced his decision to buy Sky. It’s time to admit he got a bad tip.

(This is a Breakingviews prediction for 2023. To see more of our predictions, click here.)

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