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Comcast (NASDAQ:CMCSA) is playing a dangerous game of risking irrelevancy. Toward the end of last month, the Comcast stock price fell sharply. I can understand why. Management announced that it had won its bid for European pay-TV provider Sky (OTCMKTS:SKYAY). What they actually won was an eventual road to the unemployment line.
I don’t want to come off overly dramatic. Clearly, for CMCSA stock to gain back investor favor, the company had to do something. But what it really ought to have done was something sensible. Sure, Comcast’s CEO Brian Roberts couldn’t back down from Disney head Bob Iger. Disney won a high-profile battle for Fox (NASDAQ:FOXA). Therefore, Comcast couldn’t go home empty-handed.
Then again, maybe it should have. The common adage states that “a dollar saved is a dollar earned.” Roberts clearly opted for another saying: “you have to spend money to make money.” But investors will seriously question why management forked over almost $39 billion. Comcast stock is extremely leveraged — and the purchase price doesn’t help.
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Currently, buying CMCSA stock exposes you to nearly $62 billion in debt. The problem is that the company is only sitting on $5.7 billion in cash. Therefore, a good chunk of the Sky deal must be financed.
With a generally stronger dollar, and benchmark interest rates jumping to multi-year highs, the timing couldn’t be worse for the Comcast stock price. Moreover, this trend probably won’t abate in the nearer-term. The Trump administration sees no need for an overly dovish monetary policy, which should push rates even higher.
Let’s also talk about Sky’s financials. While Sky currently enjoy a robust business, it’s also cash poor and debt heavy. So why on earth did Comcast’s leadership team fight for Sky? They may have failed their due diligence.
Comcast Stock Exposed to an International Liability
To more fully answer the previous question, both Comcast and Disney sought Sky for potentially lucrative synergies. Sky essentially owns European TV, levering apparently wildly popular programs. With either Comcast or Disney, it can add its own content, providing a compelling entertainment package for new subscribers.
Most importantly, the British media giant owns the exclusive broadcasting rights to the English Premiere League, or EPL for short. For the uninitiated, the EPL is like our NFL, but in many ways bigger. Soccer is the most popular sport in the world, and the EPL is the world’s most-popular soccer league. Put two and two together, and you can see why management had high hopes for CMCSA stock.