technology

Comcast Bid Would Create ‘Huge Behemoth’ With $170 Billion Debt

Updated on
  • Cable TV company is said to line up financing for Fox assets
  • Increased leverage would guarantee a downgrade, analysts say

BTIG's Greenfield Says Comcast Is in a Really Difficult Position

Comcast Corp., if it ends up bidding for 21st Century Fox Inc.’s entertainment assets, could become America’s largest corporate borrower and its credit ratings may teeter at the bottom edge of investment grade.

Assuming that the cable company also completes its acquisition of a 61 percent stake in European pay-TV group Sky Plc that Fox doesn’t already own, Comcast would come out with a debt load of around $170 billion, surpassing telecom giants Verizon Communications Inc. and AT&T Inc., according to Andy Stone of Invesco Ltd.

“You’re going to have this huge behemoth,” said Stone, senior credit analyst at Invesco. For money managers who group media and telecom companies in the broader TMT basket for portfolio allocations, they’d likely have to reduce some of their exposure to Comcast, AT&T or Verizon to maintain diversified investments, Stone said.

“You would have to treat this as three names that are probably going to trade with a very high correlation, so you’d have to make your bets accordingly,” he said.

Taking Over the Top

Comcast would likely be new largest borrower if successful with Sky, Fox bids

Source: Company filings

Note: List excludes financial companies

That’s a problem for BBB companies that are pushing their leverage to the limits of the investment-grade universe. Lenders have proven more than willing to finance large acquisitions in recent years as they reach for yield in a low-interest rate environment. However, that could change as the Federal Reserve starts hiking rates, which could increase borrowing costs across the board.

Concerns that Comcast is taking on too much contributed to a stock decline of 5.6 percent on Tuesday to $30.59. That was the worst drop in more than two months.

Counter Bid

Comcast is lining up financing to buy Fox’s assets, countering Walt Disney Co.’s previously accepted $52 billion all-stock bid that would also include the assumption of debt. Comcast is asking banks to increase the bridge financing line they have already arranged for the Sky offer by as much as $60 billion to finance the Fox bid, according to a person with knowledge of the matter, who asked not to be identified because the discussions are private.

Representatives for Philadelphia-based Comcast and Burbank, California-based Disney declined to comment.

Already the largest U.S. cable TV company, Comcast would emerge with an even larger debt load, tacking on another $100 billion to its balance sheet. Debt would creep up to at least 4.5 times a measure of earnings known as Ebitda, a high level for an investment-grade company and about double Comcast’s ratio now.

Whether Comcast is the largest U.S. corporate borrower may hinge on AT&T’s ability to close its acquisition of Time Warner Inc., a deal the government is trying to block.

Leverage Increase

Chief Financial Officer Michael Cavanagh said on an April 25 earnings call that Comcast would not consider using equity financing for M&A purposes given where its stock is trading. While he wouldn’t say how much debt he’d be willing to take on, he said “we like the leverage that we have and the strength of the balance sheet.” Cavanagh also said that if Comcast should temporarily increase its borrowings, the company would “bring it back to the neighborhood it’s been operating in in a reasonable period of time.”

That commitment to deleverage would be crucial for Comcast in maintaining favorable credit ratings, according to Bloomberg Intelligence analyst Stephen Flynn. Should AT&T succeed in its acquisition of Time Warner, its ratings would drop to the mid BBB range, and with a $163 billion debt load that could take on another $23 billion if the deal closes, “that’s about as large as you want to go at that credit rating,” Flynn said.

“I don’t think Comcast would want to get there. When you get to that size, you really have to start to be careful,” he said. Flynn estimates that Comcast’s debt would rise to $165 billion if successful with both the Sky and Fox bids.

‘Additional Pressure’

Comcast is currently rated A3 by Moody’s Investors Service, four steps above speculative grade. Moody’s said that Comcast’s offer for Sky won’t impact ratings, but combined with a bid for Fox’s assets, it would almost certainly be downgraded, according to both Stone and Flynn. S&P Global Ratings rates Comcast an equivalent A-.

S&P said in February that it may cut Comcast after it announced a plan to buy the Sky stake, and an all-cash bid for Fox would “certainly put additional pressure on the ratings,” S&P analyst Naveen Sarma said in an interview.

“The clear message is large communications companies are more than willing to sacrifice their credit ratings in response to M&A opportunities for the business,” Flynn said.

— With assistance by Christopher Palmeri, and Gerry Smith

(Updates with stock reaction in sixth paragraph, AT&T’s total debt figure in 12th paragraph, quote in final paragraph.)
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