Comcast swoops for Sky

Comcast’s bid comprises an all-cash offer of £12.50 per share, a premium of 16% to the current 21st Century Fox offer. It values Sky at approximately £22.1 billion.

Comcast was rebuffed in December when its $60bn offer for Fox was turned down in favour of Disney’s $52.4bn offer. Reports had suggested it was mulling another offer but it seems to have changed tack and preferred to go after Fox’s own target in Sky.

There was every chance that having been rejected, Comcast would spoil the Mickey’s party. There are two ways we can view it: one is to thwart Disney’s play for Fox and launch a second attempt for the whole of Fox. The other way to look at this seems more logical: Comcast’s approach for Fox always centred on Sky and its European pay-TV subscription revenues. So why not cut out the rest of the Fox empire and go for the jewel in the crown? US regulatory concerns always made its bid for Fox problematic – but when you strip it down to just a play for Sky, these regulatory issues are far less pronounced, if there are any at all. The rationale of the deal is equal or even greater than its bid for the much larger Fox assets. By making a play for Sky now it can get what it wants before Disney gets close – timing is everything and Comcast seems to have played its hand very well so far.

A bid like this would normally require the largest shareholder’s support but in this event it seems impossible as Murdoch owns 39% of Sky – it will require a significant offer to swing it for the remaining 61%. Comcast says it would like to own the whole of Sky and is looking to acquire over 50% of the shares. With Fox owning 39%, Comcast needs 82% of non-Fox shareholders to approve the deal.

It’s hard to see Murdoch just handing it over to Comcast after spending years building this up and setting up the Disney mega merger. This implies a higher counter offer, which appears to be what the market is betting on now, with the stock trading at above £13, up 19% on the day. As far as a counter-offer, Fox may not need to significantly up its offer - it could switch to a Takeover Offer from the current Scheme of Arrangement, thereby allowing it to use its shares in the vote. Nevertheless it appears a bidding war looms – there is even talk of a third bidder potentially swooping in now that Sky is now very much open to all-comers.

Big synergies are clearly possible – Comcast sees a ‘strategic opportunity’ to grow its business in Europe and it says the deal would be accretive to its free cash flow per share in year one.

Geographic diversification is a supporting factor - Comcast is massive in North America, but has less presence in Europe and the UK. Comcast thinks it can increase international revenues from 9% to 25%. It can tap Sky’s recurring revenues in Europe and Sky can harness Comcast’s US and global presence (through NBCUniversal) for content distribution. Cord cutters have had a bigger impact in the US than in Europe, so Sky offers good diversification for Comcast. Question is whether two old media giants can combine to fend off cord-cutters longer term. Whatever happens, traditional content providers are being forced to rethink business models since the arrival of cord-cutters.

Comcast is waving the ‘news impartiality’ flag and says it is confident of receiving ‘all necessary regulatory approvals in a timely manner’. Certainly media plurality concerns probably wouldn’t apply given it is not really a player here – but they don’t anyway if the Fox-Disney deal goes ahead, and it does look as though Murdoch’s remedies could be enough to assuage the CMA’s concerns. Nevertheless, it looks like slick timing on the part of Comcast, getting its bid in before the CMA delivers its verdict.

On a pure operational level, the recent football rights auction also appears to have been a factor – Sky got a good deal and this has undoubtedly added to its value. Again the timing of this offer appears linked to Sky winning those rights at a good price. Overall, Sky is performing well in major markets – UK, Germany and Italy.

Misconduct provisions and cash call for Provident Financial: shares soar

Shares up 70% after a rights issue is announced? It can only be Provident Financial.

Usually it’s best to get all the bad news out at once – and Provident Financial is now a specialist in this kind of fare. But actually today’s update was not all bad – the total FCA misconduct provisions of around £200m are well below the £300m that some touted and the £300m cash call is a lot less than then £500m that was being talked about in the press.

In fact investors are so impressed at the shoring up of the balance sheet that shares have jumped 70% in early trading.

Rumours of investor apathy towards a cash call seem to be unfounded – not because there is no cash call, but because at the very least the £331m rights issue (net £300m, or about a third of market cap) is fully underwritten. Management had to really low-ball their offer here – the new shares have been flogged at 315p, which represents a discount of 46% to yesterday’s closing price of 588p, or about a tenth of where the shares were before the botched reorganisation was revealed less than a year ago.

But the cash call was made essential as the group’s CET 1 ratio had declined to 14.5%, well below its minimum regulatory capital requirement of a ratio of 25.5%. Assuming the £300m rights issue goes ahead, CET 1 should return to 28%. The reason for this mega-cash call is not just the well-documented reorganisation fiasco in core business, but also a sizeable provision for past mis-selling.

The good news is that it has reached a settlement with the FCA in relation to its investigation into the sale of Vanquis Bank's Repayment Option Plan. Bad news is that it is taking a £172.1m provision for this, largely made up of compensating customers for being mis-sold the product.

On top of this, management is providing £20m to cover an ongoing FCA investigation into Moneybarn, while the cost of home credit recovery plan adds a further £32.5m in exceptional costs, which total £225m for 2017.

All of which means a statutory loss before tax of £123m for the year. These one-off costs won’t be there next year but it’s the underlying picture, particularly in the home credit division, that is more important and here adjusted profit before tax reduced by 67.3% to £109.1m. The Consumer Credit Division reported an adjusted loss before tax of £118.8m, in line with January’s guidance of £120.

Recovery in home credit has been slower than anticipated. As previously noted, Provident has not been able persuade lost customers and agents to come back on board despite its efforts; or as management puts it – a lower rate of 'reconnection' than expected.

While there is a plan to fix what went wrong, management is sticking with a revamped version of the operating model that caused all the problems. Self-employed agents are still out, customer experience managers are in. Whilst intended to allow Provident to manage the entire customer journey, it’s the self-inflicted source of all the problems and ought to be ditched.
Collection performance has improved over the last few months - in December it stood at 78%, which was up from 65% in September and 57% in August. But this was still well below the 90% seen under the old operating model.

Despite all the concerns management is confident that this cash call, combined with drawing a line under the FCA’s investigations, puts it in a strong enough position to resume a progressive dividend policy in 2019. 

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