Shares of Philadelphia-based telecommunications giant Comcast Corp. (CMCSA) sank 7% Wednesday after the company made a surprise bid for British TV broadcaster Sky plc. Following the announcement, in which Comcast is now neck in neck with 21st Century Fox Inc. (FOX) and possibly Walt Disney Co. (DIS) to take over the company, one team of analysts on the Street is more bearish on CMCSA stock, highlighting acquisition strategy "uncertainty." (See also: Comcast's $31B Sky Bid Could Start Bidding War.)
On Wednesday, Macquarie Research reduced its rating on CMCSA to neutral from outperform on risks associated with its cash offer to buy European pay-TV provider Sky for 22.1 billion pounds, or about $31 billion. In December 2016, Fox offered 18.5 billion pounds, or nearly $26 billion, for a 61% stake in Sky that it did not already own. In a separate deal last year, Disney agreed to buy key assets from Fox, including Sky, in a deal worth $52.4 billion. The Street now expects a bidding war to ensue between Fox and Comcast, or for Disney to make a direct offer to Sky shareholders. Investors have sent shares of the U.K. satellite broadcasting company up 22% on the news.
Macquarie's Amy Yong lowered her 12-month price target from $47 to $42, expecting the stock to gain 13.9% from Wednesday afternoon, as shares traded up about 0.6% at 36.89.
A Better Use of Cash?
"The potential to expand internationally, double its scale, and leverage cross-border intellectual property is undoubtedly a great one. However, uncertainty around the M&A playbook and increased net leverage to 3x marks a shift in what would otherwise be a clean thesis," wrote Yong in a note to clients Wednesday. "Though the downside in CMCSA shares is limited after yesterday's move, we believe the unpredictability could cap near-term upside."
Given the negative headwinds facing the satellite television market, the analyst sees better ways for Comcast to use its cash.
"For one, Comcast could buy back its own stock at 8x vs acquiring Sky at 12x; although the deal is expected to be accretive in Y1, we question the synergies given the cross border combination." (See also: Disney, Fox Deal Would Be a Win-Win: Macquarie.)