Comcast Out of Fox Bidding War, Focused on Landing Sky

Comcast

Comcast has dropped out of a bidding war with The Walt Disney Company (DIS) for 21st Century Fox’s (FOXA) film and television assets to focus its efforts on acquiring Sky Plc (SKYAY), the “crown jewel” of the Fox portfolio. By pulling out of the competition for Fox’s entertainment assets, Comcast avoids bidding up the implied value of SKYAY; the consequence of an “arcane provision in U.K. takeover rules”. Back on July 11th, Comcast (CMCSA) improved its cash offer for the European cable provider by 18% (to +/- $19.50/share, $34 billion); a 5% premium to the latest FOXA offer. Disney has indicated in regulatory filings that it will determine if FOXA is to continue with its pursuit of SKYAY; no decision has been made and one is not expected prior to the DIS shareholder vote on July 27th (re: Fox acquisition).

Howie Long-Short: Comcast’s decision to drop out of the bidding all but ensures that The Walt Disney Company (DIS) will take down the Fox film and tv assets. Of course, DIS had always been considered the front-runner for those FOXA properties having submitted the highest offer ($71.3 billion vs. Comcast’s $65 billion) and maintaining the support of both Rupert Murdoch and President Trump. Comcast shares popped 3% on the news, but nearly all gains realized were lost by Friday’s close ($34.30).

CMCSA appears to be willing to split the spoils with DIS, taking SKYAY and leaving the balance of the Fox assets for Disney’s taking. Comcast is now well positioned financially to outbid Disney should they make an aggressive play for SKYAY. BTIG Analyst Rich Greenfield expects that to happen saying, “while it is certainly possible that Fox (and in turn, Disney) is going to walk away from Sky and not match/exceed Comcast’s offer, it does feel hard to believe.”

SKYAY is the asset that Comcast really wants. The British pay-TV service could bring both the original content and distribution (satellite & broadband) capabilities to make the alliance “a mini Comcast-NBCU”. Adding 23 million subscribers across 7 countries, also give CMCSA the international expansion it seeks as the company strives to keep up with Amazon and Netflix in the global streaming race. While Comcast seeks 100% of Sky (including FOXA’s 39% stake), the company appears willing to settle for majority ownership; it’s unclear if Disney intends on selling its stake.

I asked Dan Cohen, Octagon SVP, Global Media Rights Consulting Division which deal (SKYAY or Fox Film/TV assets) contains the most valuable sports media rights?

Dan: Sky is the stronger sports specific acquisition with a robust portfolio not only in the UK, but other significant European markets. The crown jewel is obviously Premier League, but F1, Cricket and Golf are significant as well. Sky Italia offers up premium content after just renewing Serie A rights in Italy and Sky is a player in Ireland Spain, Germany and Austria.

Editor Note: Fox assets include Star India and Fox International channels, but no domestic rights. Comcast (had they continued pursuit of Fox assets) also intended on divesting the 22 RSNs to avoid anti-trust concerns.

Fan Marino: As Dan notes, SKYAY’s portfolio of sports broadcast rights is impressive (particularly the EPL), but the control over and value of those rights remains tentative. Exclusive broadcast deals cannot be counted on to last and as MoffettNathanson analyst Craig Moffett astutely pointed out, “absent these exclusives, Sky is, well, just satellite TV.”

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Comcast Positioned to Take Down Sky, Could Drop Pursuit of Fox Assets (including 22 RSNs)

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21st Century Fox (FOXA) raised its bid 30% (to +/- $18.50/share) for Sky PLC (SKYAY) on Wednesday, before Comcast (CMCSA) improved its cash offer for the European cable provider by 18% (to +/- $19.50/share); a 5% premium to the latest FOXA offer. Comcast’s offer was reportedly “recommended by Sky’s independent directors” and the company is said to have “earmarked funds to fulfill the terms of the deal”; the company hopes to complete the acquisition by October, having already received regulatory approval (had been an issue with Fox’s Dec. ‘16 bid) from the EU, Austria, Germany, Italy, and Jersey. The WSJ indicated that if Comcast were to take down Sky, the company could drop its pursuit of Fox’s film and TV assets; FOXA’s existing 39% stake in SKYAY has been a target in that deal.

Howie Long-Short: The Walt Disney Company is considered the front-runner for the FOXA properties having submitted a $71.3 billion offer; obtaining full control of SKYAY is critical to completing that transaction, which explains FOXA’s interest in the British television group.

As for Comcast, SKYAY could bring them both the original content and distribution (satellite & broadband) capabilities that would make the alliance “a mini Comcast-NBCU” and give CMCSA the international expansion it seeks as the company looks to keep up with Amazon and Netflix.

I asked Dan Cohen, Octagon SVP, Global Media Rights Consulting Division which deal (Sky or Fox assets) would best position Comcast in the sports media sector?

Dan: Sky is the stronger sports specific acquisition with a robust portfolio not only in the UK but other significant European markets. The crown jewel is obviously Premier League, but F1, Cricket and Golf are significant as well. Sky Italia offer up premium content after just renewing Serie A rights in Italy and Sky is a player in Ireland Spain, Germany and Austria.

Editor Note: Fox assets include Star India and Fox International channels, but no domestic rights. Comcast would also be divesting the 22 RSNs to avoid anti-trust concerns.

Howie: What are the 22 RSNs worth?

Dan: I wouldn’t be surprised if they could fetch as much as $28 billion. Either winner (Comcast or Disney) will be well positioned to reap billions from the sale. The capital earned from the RSN divestiture can help offset the purchase price or be applied to aggressively pursuing even more premium sports content.

FOXA shareholders were less than pleased with Wednesday’s developments, shares declined -4% on the day closing at $47.79.

Fan Marino: Speaking of 21st Century Fox, it’s being reported that despite ad revenue increasing from 4 years ago, the company is going to lose money on the ’18 World Cup. Simply put, the company overestimated (by 7-10%) the number of viewers they expected to tune-in (and guaranteed in ad deals) and are now being forced to offer “make goods” (i.e. additional air time) to advertisers. Interestingly, Telemundo won’t post a profit either; that’s surprising if only because it set network ratings records (including 125 million live streams) throughout the tournament.

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Comcast Preparing to Divest 22 Fox RSNs, To Submit 2nd All-Cash Bid by July 27th  

Comcast

Comcast (CMCSA) is reportedly lining up buyers for 21st Century Fox’s (FOXA) regional sports networks to alleviate anti-trust concerns, as it prepares a bid that would be favorable to The Walt Disney Company’s (DIS) $71 billion dollar offer (cash and stock) for FOXA film & TV assets. CMCSA is open to divesting all 22 RSNs, but believes just 8 overlap with the existing Comcast sports footprint. Reuters is reporting that the company has held conversations with publicly-traded buyout firms Apollo Global Management (APO) and Blackstone Group (BX). Just 2 weeks ago, the U.S. Department of Justice approved DIS’ bid after reaching a settlement with the mouse house to rid itself of the regional sports networks.

Howie Long-Short: It’s been assumed that the RSNs will fetch $20 billion+ (Comcast’s first bid placed a $24 billion valuation on them), so selling them off will help Comcast coffers as the company prepares to submit a 2nd all-cash bid (no dollar amounts given). FOXA shareholders are scheduled to vote on the DIS bid on July 27th, Comcast will submit their bid prior.

Rumors of P.E. firms taking down the RSNs is relatively surprising as most of the discussions surrounding potential landing spots having focused on telecom and media companies. Everyone from Amazon (AMZN) and YouTube (GOOGL) to AT&T (T) and Dish Network (DISH) has been mentioned.

I asked T.K. Gore, sports media consultant, advisor and professor, for his thoughts on who lands the RSNs?

T.K.: The RSN world is a tricky business and experience — coupled with deep pockets — matters. Look for groups like Liberty Media and AT&T to get involved given their experiences.

MSG is among the companies that has been associated with having interest in the regional networks. James Dolan has said that he’d be interested in acquiring the assets “at the right price”, noting they’re highly profitable now but a “slow, declining revenue stream.”

Fan Marino: The 22 RSNs collectively control exclusive broadcast rights to 44 NFL, NBA, MLB & NHL franchises, including teams in Detroit, Southern California, Dallas, Cleveland and Miami. The YES Network is the most valuable of the lot, worth an estimated $4 billion; the Yankees are likely to re-acquire that network.

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Disney Agrees to Divest 22 Regional Sports Networks

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The Department of Justice has approved The Walt Disney Company’s (DIS) $71.3 billion ($38/share, increased bid from $52.4 billion, includes +/- 50% in cash) acquisition of 21st Century Fox (FOXA) television and film assets, after reaching a settlement with DIS that calls for the company to divest FOXA’s 22 regional sports networks. U.S. A.G. (Anti-Trust Division) Makan Delrahim, concerned DIS’ control of the RSNs would create a potential monopoly, said that the settlement ensures “sports programming competition is preserved in the local markets where Disney and Fox compete for cable and satellite distribution.” The settlement, which requires DIS to divest the RSNs within 90 days of closing, requires approval from a judge; but that is a formality. DISintends on pursuing a 3rd party buyer for the RSNs, as opposed to submitting a new offer; FOXA is not thought to be interested in retaining the assets.

Howie Long-Short: DOJ approval gives DIS an advantage over Comcast (CMCSA) in the competition for the Murdoch empire, just two weeks after Comcast submitted an all-cash bid worth $65 billion ($35/share). While the approval alone won’t win DIS the assets (Comcast is expected to submit a counter offer), it won’t hurt considering it’s been thought the FOXA board has long preferred to sell the assets to DIS in the belief the Comcast bid is bound to face anti-trust concerns. That’s debatable. CMCSA would also divest the RSNs and FOXA’s stake in Hulu is really the only asset that might draw anti-trust concerns; and that doesn’t appear to be a major hurdle. It’s been thought FOXA assets could draw upwards of $43/share.

It should be noted that if the DIS deal goes through as is, FOXA shareholders would own 19% of the joint company. FOXA shares are up +11% (to $49.79) since DIS submitted their latest offer on June 20thDIS hasn’t fared as well, the stock is down -1.25% (to $104.77) over that same period.

Fan Marino: While the Yankees are likely to repurchase YES Network, that still leaves 21 RSNs and a lot of regional sports broadcast rights for taking. Sure, it’s possible that FAANG will pursue exclusive broadcast rights, I would bet on an established linear player making a play to acquire the 5th most important channel on a subscriber’s cable package. CBS (think: CBS Sports HQ), Turner Sports (T, B/R Live) and Discovery Communications (DISCA, which has made a significant push for rights in Europe) are all possible landing spots.

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Adidas Tempers World Cup Sales Expectations

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Adidas AG (ADDYY) has tempered merchandise sales expectations in Russia for this summer’s World Cup, citing international sanctions (see: Ukraine crisis) that have weakened the ruble as declining oil prices have slowed the Russian economy. In 2014, (hosted Sochi Olympics) ADDYY had over 1,100 stores across Russia/CIS, but over the last 4 years the company has closed 500 of them and reallocated the marketing dollars accordingly. The absence of several prominent teams (see: U.S., Italy, Netherlands) is also expected to have a negative impact on merchandise sales.

Howie Long-Short: Though Adidas currently does just “a little more than half” the sales total it did during its ‘14 peak ($1.3 billion, 3x Nike’s total w/in market) in Russia, the company now operates at higher margins in the region as a result of strict cost discipline and an increase in pricing. Adidas reported a -16% sales decline in Russia/CIS (and -5% decline in EMEA) in Q1 ’18 with CEO Kasper Rorsted attributing the disappointing result to “challenging market conditions”.

Though Adidas has acknowledged it won’t approach the total sales figures that it did in ’14 (Brazil), the company is expecting sales of team soccer jerseys (the most popular merchandise item) to set a record during this World Cup. Twelve (up from 9 at ’14 WC) of the 32 teams competing in Russia (including the host country) will be wearing ADDYY kits, the most of any apparel provider (Nike is 2nd with 10 teams). For reference purposes, ADDYY sold 8 million jerseys in 2014.

It’s worth noting that Adidas is also the manufacturer of the official match ball. German soccer consultant PR Marketing projects the company will sell 10 million balls after moving 14 million “Brazuca” balls in ‘14.

On May 3rd, Adidas reported that efficiency savings drove bottom line growth +17% (to $647 million) in Q1 ’18. Accounting for currency effects, sales rose roughly 10% YoY (to $6.4 billion) with the company’s Adidas Originals line and running, training and soccer verticals driving the growth. North American sales rose +21% YoY and sales in China rose +26% YoY, with the Asia-Pacific (+15%) and Latin America (+10%) markets also experiencing double-digit growth during the most recent quarter. ADDYY shares are down -16.5% over the last 2 months, but remain +10.5% YTD; closing on Tuesday at $110.28.

Fan Marino: The U.S. team’s absence from the tournament may hurt total merchandise sales, but it hasn’t had a negative impact on domestic viewership through the first 4 days. Matches on Fox and FS1 have averaged 2.24 million viewers (including 4 million+ for Germany/Mexico & Brazil/Switzerland), a 32% increase over the Group Stage average from the last 4 World Cups combined.

Telemundo (CMCSA) is experiencing similar success thus far. The network drew 6.56 million TV viewers for the Mexico/Germany game, making it the most watched Group Stage match in Spanish-language TV history and the most watched sporting event in network history.

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Yankees Seek to Re-Acquire YES Network, Hold Buyback Option

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The New York Yankees have expressed interested in re-acquiring the 80% of the YES Network controlled by 21st Century Fox (FOXA), if FOXA is to proceed with the sale of its film and TV assets (including 22 RSNs). The team reportedly holds a buyback option in the event the network (the most valued/viewed RSN among FOXA lot) goes up for sale. Last week, we wrote that Comcast (CMCSA) had submitted a $65 billion all-cash offer for 21st Century Fox’s (FOXA) assets that trumped the $52.4 billion all-stock offer that The Walt Disney Company (DIS) placed in December; DIS is expected to submit a counter bid. Yankee Global Enterprises, the holding company that owns the baseball club and NYCFC, controls the remaining 20% of YES.

Howie Long-ShortFOXA initially purchased a 49% stake in the YES Network for $1.862 billion in 2012. In 2014, the company acquired an additional 31% at roughly the same $3.8 billion valuation. The 1st place Yankees are drawing the network’s highest ratings since ‘12 and YES also controls the rights to broadcast both Brooklyn Nets and NYCFC games, so it’s certainly not unreasonable to expect FOXA to sell the asset at a valuation north of $4 billion. This means the team would be re-acquiring the network at a loss. That may not be of concern for the franchise though, as they likely value the ability to own/distribute their content with the recent proliferation of direct to consumer platforms/services.

According to Moody’s Investor Service, if Comcast were to acquire FOXA assets the combined entity would carry +/- $170 billion in pro-forma debt; more than every company in the world not named AT&T/Time Warner (which just completed a $85 billion merger).

Fan Marino: Back in April, Forbes released its rankings of the most valuable Major League Baseball teams. The Yankees topped the list with a $4 billion valuation, making them the 2nd most valuable team in all of sports; behind only the Dallas Cowboys ($4.2 billion). The team generated $619 million in revenue last year, 96.5% more than the league average ($315 million). Forbes has the NYY valued at +/- 6.5x revenue, slightly higher than what the Houston Rockets sold for in 2017; for comparison purposes, the Carolina Panthers recently sold for less than 6x revenue. I continue to maintain that David Tepper got a good deal.

The Yankees have signed the PBP voice of the YES Network (for Yankee games) to a 3-year extension (network option for 2 more years) worth more than $1 million/year. The deal makes Michael Kay the highest paid local broadcaster in MLB. Kay takes home a higher annual salary than some of the team’s biggest stars; Luis Severino, Gary Sanchez and Aaron Judge will make $604K, $620K and $622K respectively this season.

Fun Fact: The value of the NYY has compounded 15% annually since George Steinbrenner group bought the team for $8.8 million in 1973.

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Comcast Submits $65 Billion All-Cash Offer for Fox Film/TV Assets, Including 22 RSNs

CMCSA

Just 24 hours after the announcement that a federal judge had approved AT&T’s $85 billion takeover of Time Warner, it was reported that Comcast (CMCSA) submitted a $65 billion all-cash bid for 21st Century Fox’s (FOXA) film and TV assets (including 22 RSNs); trumping the $52.4 billion all-stock offer that The Walt Disney Company (DIS) had placed in December. Comcast’s interest largely surrounds FOXA’s 30% stake in Hulu, as the acquisition would give CMCSA controlling interest in the OTT service (already own 30%). NBCUniversal CEO Steve Burke stated, “we would be very very interested in growing that business.” In fact, it’s possible that if Comcast’s offer were to be selected, the company wouldn’t even end up controlling the RSNs; language within their bid indicated the company would match any regulatory commitments made by DIS; including to “divest… any of the RSNs.”

Howie Long-Short: FOXA shares rose +7.7% (to $43.66) on Wednesday following report of the Comcast bid. DIS closed up +2% (to $106.30), while CMCSA shares remained flat ($32.32) as investors expressed skepticism about the company increasing their debt level to 4x earnings; necessary to finance both the Fox deal and their purchase of Sky PLC (SKYAY).

It’s certainly worth noting that Comcast’s bid places a +/- $24 billion valuation on the 22 RSNs.

SKYAY is another name to watch. If DIS counters CMCSA’s bid, it’s possible that Fox will up its bid (currently $14.38/share) for the European pay-tv provider. Fox currently owns 39% of the company and was planning to acquire the remaining 61%, with the intention of flipping the asset as part of the proposed $52.4 billion transaction. Should a bidding war arise, John Janedis, an analyst at Jefferies LLC said it wouldn’t be unreasonable for the winning bid to reach $80 billion. For reference purposes, Comcast bid $16.72/share for 61% of Sky. The domestic cable/internet provider wants the asset (and Star – India) to expand its business overseas.

Fan Marino: AT&T’s (T) acquisition of Time Warner (TWX) includes several sports-related properties including Turner Sports, Bleacher Report and the newly launched Bleacher Report Live service; an untethered (i.e. no subscription needed) premium sports streaming service. T also takes controlling interest in the country’s largest pay television distributor, DirectTV. TWX shares rose 2% on Wednesday to $97.95, while T shares declined 6.2% (to $32.22) on the news.

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BT Sport, “New Online Player” Land EPL Broadcast Rights at Discount Rates

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Less than four months after Sky (SKYAY) and BT Sport (BT) agreed to spend a combined $6.194 billion on the English Premier League’s five most valuable domestic broadcast rights packages, BT Sport and a “new online player” have agreed to purchase the rights to the last two available packages (F & G) at a discount rate. EPL clubs have decided to sell the rights bundles at a cut-rate price after each failed to meet their reserve prices in February’s auction and concluding that Executive Chairman Richard Scudamore overestimated the interest from non-traditional broadcasters (think: FAANG). Financial terms of the deals have not been disclosed, but the new broadcaster’s identity will be revealed at a club meeting on Thursday; speculation surrounds both Facebook and Amazon.

Howie Long-Short: Despite the decline in the value of domestic rights, Scudamore is confident overall media rights will increase “by a decent amount” during the next cycle (’19-’20 through ’21- ‘22). Any lost domestic revenue will be offset by skyrocketing international rights. NBC (in U.S. market), ESPN (Brazil) and SuperSport (Sub-Saharan Africa) have all committed to paying a significant increase for the rights to broadcast EPL games.

As we know, NBC is owned by Comcast (CMCSA), while ESPN is property of The Walt Disney Company (DIS). SuperSport is a subsidiary of the South African based internet and media group, NASPERS. The company trades on the Johannesburg Stock Exchange under the symbol NPN or OTC with the symbol NPSNY. Shares rose 71.34% in 2017 on the back of Tencent (TCEHY), as NASPERS owns 31.2% of the Chinese internet giant. NPSNY hasn’t performed as well in 2018 though; the stock is down -7% YTD, despite being +8% (to $52.38) since last Thursday’s close.

Fan Marino: Back in February, the EPL announced BT won package A ($409.3 million/season, which includes 32 games played on Saturdays at 12:30p GMT), while SKYAY took home packages B, C, D & E ($1.655 billion/season). Packages F & G each carry 20 live midweek and bank holiday matches per season. The addition of 20 more games will give BT 52 live broadcasts/season, up from 42 under the expiring agreement.

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NBCUniversal To Sign Monster Deal for RAW, WWE Shares Skyrocketing

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It’s been reported that NBCUniversal (CMCSA) intends on retaining exclusive broadcast rights to WWE Monday Night Raw with a deal worth +/- $240 million/year. Under the terms of the proposed contract, RAW will remain on USA Network where it’s resided since ’05. WWE will have to find a new home for SmackDown Live though, as NBCUniversal passed on renewing its expiring deal with the franchise. It’s been rumored that the SmackDown Live package could be worth an additional +/- $110 million/year (worth $30 million/year under current deal), with Fox, Amazon Prime and Facebook Live all considered viable landing spots for the Tuesday night show (6th most watched on cable TV).

Howie Long-Short: The outcome of this deal represents best-case scenario for the wrestling promotion. The value of their broadcasts will double (worth $180 million in ’18) and should Fox (FOXA) land SmackDown Live, it’s possible that they would broadcast the show on their over-the-air TV network; had Fox won rights to both shows, it’s likely SmackDown would have been relegated to FS1 (30 million less households). Should SmackDown Live end up on Fox, the show would have the opportunity to beat RAW in the ratings for the first time since the company split the roster in 2002.

The WWE is projecting record revenue in ’18, boosted the company’s deal with the Kingdom of Saudi Arabia (reportedly worth +/- $20 million/year) and with a reduced corporate tax rate, it’s possible (if not likely) the company will set a record for profits too. Combine that rosy outlook with the enthusiasm over the company’s pending TV deals and it explains why shares are up 18% (to $51.42) since Thursday (5.17).

Fan Marino: Hulk Hogan, who has been out of favor with the WWE since ’15 (racist comments), is reportedly in discussions with the promotion about a return. Once the face of the organization, the company was quick to remove all references to the Hulkster following the incident. While purely speculation, WrestleMania 35 (New York City, April ‘19) would seem like an opportune time to bring him back; of course, Hogan and Mr. T faced Rowdy Roddy Piper and Paul “Mr. Wonderful” Orndorff in the main event at WrestleMania I in 1985.

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USMNT Absence Benefiting Telemundo, WC Ad Inventory Nearing Sell Out

Telemundo

Telemundo, which controls U.S. Spanish-language broadcast rights to the 2018 FIFA World Cup, has announced Coca-Cola, Sprint and Volkswagen will be premier sponsors of their tournament coverage. Coca-Cola will be the presenting sponsor of the Telemundo Deportes Post-Game show and in-game match clock, Sprint has signed on as the official halftime sponsor for all 64 matches and Volkswagen will serve as the presenting sponsor of the network’s World Cup primetime show (7p EST). In total, 20 advertisers have signed on for Telemundo’s coverage of the quadrennial tournament; NBCUniversal is claiming network ad inventory is “approaching 75% sold out.”

Howie Long-Short: The absence of the USMNT from the 2018 World Cup has been a boon for Telemundo, as advertisers have chosen to forego spending with Fox Sports (own U.S. English-broadcast rights) in favor of the NBCUniversal subsidiary (note: VLKAY, VZ are not among them, they will be advertising on both networks).

While the U.S. team’s failure to qualify has helped Telemundo ad sales, it’s expected to hurt viewership. In ’14, matches featuring the USMNT on Univision (held U.S. Spanish-language rights) drew an audience 44% larger than other group stage matches. With no USMNT to build programming around, Fox has also increased their focus on the Mexican national team; coverage likely to pull viewers from Telemundo’s target audience, the 21 million bilingual viewers in U.S.

Telemundo is owned by NBCUniversal, a Comcast (CMCSA) company. NBCUniversal tabbed February it’s “best Feb ever” after generating $1.6 billion in incremental revenue from the Super Bowl and Olympics, so significant fiscal growth was expected when CMCSA reported Q1 earnings in late April. The company reported net income increased +21.2% YoY (to $3.1 billion), a figure that would have been higher had Universal Pictures not experienced a -16% YoY decline in revenue.

For those wondering, Telemundo is paying $600 million for Spanish-speaking broadcast rights to the 2018 & 2022 World Cups, while Fox pays $400 million for U.S. English-speaking rights to the same 2 tournaments.

Fan Marino: The U.S. isn’t the only high-profile country to have failed to qualify for this summer’s World Cup, as Italy (4x winner), The Netherlands (finished 3rd in ’14), Chile (No. 9 in world) and Cameroon (just 2nd missed WC since ’86) will all be watching from home as well.

Looking for a team to root for? Iceland is in the tournament for the 1st time and their Viking chant is among the best traditions in all of sports.

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