These and other deals in the sectors will involve considerable new borrowing. If successful, the two Comcast bids alone would increase the amount of investment grade debt in the media sector by 27 per cent.
Let’s consider Comcast first. Disney was the original bidder for the Fox part of the Murdoch empire, and responded this week to the surprise bid with a $71 billion cash and stock counter-offer of its own. Comcast, which is controlled by the Roberts family, is likely to increase its cash offer further.
Even at the end of May, with rumours of the bid swirling round, the average spread on Comcast bonds had increased more than any other investment grade issuer in the media sector. After the bid became official, Moody’s said that it would make Comcast the second most indebted non-financial company (after AT&T).
Understanding the chart
This chart shows the average change in spread for media sector bond issuers in 2018, drawn from 13,000 corporate bonds and 1,800 issuers in the Risky Finance iBoxx database. Use the controls below the chart to change the metric or to look at a different sector.
The full dataset, including individual issuer dashboards, is available to Risky Finance subscribers.
Yet the amount of spread widening – 50 basis points – was relatively small, even after the bid was announced. It suggests that Comcast CEO Brian Roberts may succeed in his bid, and has considerable headroom to increase it in response to Disney. To understand why, we’ll use the Risky Finance debt repayment tool.
For any company in the iBoxx universe, the tool shows the annual schedule of bond interest and principal repayments for all outstanding debt (in USD, EUR and GBP). This can be displayed in units of billions of dollars, or as a percentage of the company’s current market cap.
For Comcast, we see that its current borrowing implies an annual repayment burden of about 4.5 per cent of market cap, which stands at $150 billion. Adding $96 billion of new borrowing to the current iBoxx total of $56 billion would increase the annual repayment burden to around 13 per cent of market cap.
That sounds like a lot, but then consider Comcast’s competitor Charter Communications. This company is a lot more leveraged, with an annual debt repayment burden that climbs to 15 per cent of market cap in the next four years.
To reach the same ratio of repayments to market cap, Comcast would need to borrow an additional $25 billion, which would allow it to pay $90 billion for Fox – well in excess of Disney’s latest offer. Or consider cable network Discovery whose annual debt repayment ratio climbs to 16 per cent next year. Matching this ratio would entail $40 billion more borrowing by Comcast, permitting an offer to Fox shareholders of $105 billion (keeping the price of Sky fixed).
One might ask why Roberts would want to match the leverage of companies like Charter, which straddles the boundary between investment grade and junk, and Discovery, which is currently loss-making. That might be Disney’s view, hoping that Roberts loses his nerve.
There are two ways of thinking about this. Most obvious is to look at the potential earnings growth of Comcast and Fox combined. Even with the prospect of enormous borrowing ahead, Comcast still trades today on a P/E multiple of 15, double that of Charter Communications. Absorbing Fox (whose multiple is 32) may support a higher share price for the combined entity, reducing the leverage.
Another angle is to consider how the refinancing prospects of weaker companies like Charter or Discovery will be affected as the Comcast juggernaut rolls towards them. Bond investors may prefer to extend credit to a stronger entity like Comcast-Fox rather than a slower growing one, raising the refinancing costs of Charter and Discovery, and pushing them into junk territory.
This crowding-out effect in the media sector could have a knock on effect on existing pure junk borrowers such as the conglomerate Liberty Global. Liberty, which borrows via operating companies such as Virgin Media, Ziggo or Unitymedia may already be anticipating this impact with its sale of German assets to Vodafone.
Any struggling media borrower will need to line up buyers soon – either Netflix, a tech firm or a telecom company.
That takes us to AT&T-Time Warner. This combination will have total debt of $180 billion, roughly the same as the putative Comcast-Fox tie-up. Time Warner’s multiple is the same as AT&T’s, so the telecom giant won’t get the growth kicker that Comcast could expect. But swallowing Time Warner will require much less leverage, leaving AT&T with an annual debt repayment burden of less than ten per cent of current market cap.
The bond market is so sanguine about the takeover that spreads on AT&T debt actually declined this year. What about other companies in the telecom sector? For those with low leverage, such as Verizon, Vodafone, Deutsche Telecom and Japan’s NTT, the question is how quickly they will jump on the vertical media merger bandwagon. And indeed already we have seen the renewed acquisition appetite of Vodafone, and Verizon has long been eyeing a bid for Charter Communications.
For telecoms with high leverage and low growth, such as Sprint, Telefonica or Orange, the same crowding out risk that concerns weaker media companies could affect them too. The pressures on them to consolidate or be acquired could increase quickly.
As long as bond markets are willing to absorb all the necessary debt – and so far they are – then the M&A frenzy in media and telecoms has a long way to run. We will see plenty more dancing until the music finally stops.