The British ‘chain principle’ is changing Comcast strategy for Fox

We’re likely entering the end-game scenario for Comcast and Disney’s pursuit of Fox’s assets. However, an obscure U.K. takeover rule called the “chain principle” has altered the bidding dynamic in what’s become a game of three-dimensional chess.

The U.K. has different rules around mergers and acquisitions than the U.S. One of these rules is a lesser-known guideline called the chain principle. The idea is that if a target company’s ownership is split, and a would-be acquirer bids on one portion of the target, the implied value of the portion of the company that received the takeover offer must be carried over to fairly value the rest of the company.

It’s sort of like the transitive property of equality — if A=B and B=C then A=C.

In this case, if Comcast tops Disney’s June 20 bid for Fox’s assets, it also affects its other outstanding bid for Sky — now valued at $34 billion. That’s because part of the Fox bundle of assets is a 39 percent stake in Sky. So if Comcast were to increase its bid for Fox, it’s also increasing the value of Sky that Fox owns.

Since Comcast now has the highest bid for Sky, at £14.75 pounds ($19.50) per share, an improved bid for Fox could raise the value of Sky even higher. In some respects, that would mean Comcast is bidding against itself for Sky.

The U.K. takeover panel hasn’t said yet if it will rule that the chain principle applies here, but a decision is expected to come soon. The panel, which is made up of ex-bankers and lawyers familiar with corporate finance, has already solicited proposals from a variety of parties, including Fox, Disney and the independent directors of Sky, to decide on the company’s “proper” valuation.

If Comcast doesn’t bid again for Fox, it’s surrendering in its quest to acquire the other Fox assets, such as Star India, a 30 percent stake in Hulu, Fox’s movie studio, and cable channels FX and National Geographic. Both Fox and Comcast plan to sell Fox’s regional sports networks, and Endemol Shine (of which Fox is selling its 50 percent stake) is running its own separate sales process. Fox’s shareholder vote on Disney’s current offer, valued at $71.3 billion at announcement (and higher if the takeover panel assigns a new value to the baked in 39 percent of Sky), will take place on July 27, if Comcast doesn’t rebid.