Fox to Buy Roku at $22 Billion Value in Streaming Video Push

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2:13Scarlet Fu:Fox shares are lower. That tends to happen. The acquired down 17 percent. In this case, Roku, interestingly enough, is also lowered down by 1 percent. Let's bring in Geetha Ranganathan. She is our U.S. media analyst here at Bloomberg Intelligence. Geetha, let's start first with what is Fox buying when it acquires Roku? What does it want from Roku here? So what Fox wants, Scarlett, is exposure to digital media. So Fox is one of those legacy media companies that really kind of doubled down on live TV. And if you look at their revenue mix right now, they have about 90 percent exposure to the linear TV ecosystem.

2:52You compare that to some of their peers, even a Paramount Skydance or a Warner Brothers Discovery, which are exposed about 50 to 55 percent. So Fox definitely one of the most heavily exposed. They've, you know, they've played it pretty safe. So they've stayed away from the really expensive streaming wars when everybody was, you know, spending billions, tens of billions of dollars on content to just kind of get streaming subscribers. They stayed away from that, but they've always kind of been shoring up capital to make this big play into digital, you know, advertising, into digital streaming. And that's exactly what they're doing today with this Roku acquisition.

3:28It helps them build up their digital advertising business. And it really helps them win the streaming war in a very unique way because Roku is a streaming aggregator. So Roku gets paid no matter which streaming service wins. And I think that's really a unique benefit here for Fox.

3:46Geetha Ranganathan:I have to admit, Keith, I'm surprised that the stock is down as much as it is down 16%. Why do you think that is? So one thing, Paul, is that this is a pretty big deal. So if you just look at Fox's market cap, for instance, it's close to about$25 billion. The equity value of the deal is about$25 billion. So definitely a really, really big size deal from a size perspective. And more important, I mean, Fox has always been very, very good in terms of its balance sheet management. They've had a pristine balance sheet, very low levels of debt, have always committed to a strong capital returns program and stock buybacks.

4:26And I think people are a little bit nervous right now because they are going to be taking on quite a sizable debt load with this transaction, more than$12 billion in debt. And while they've promised to kind of maintain their capital returns, I think the street is still a little bit nervous.

4:42Scarlet Fu:Is there any reason to think that regulators might have any objections to this? And I ask thinking that it's probably not because Fox is pretty close to the Trump administration. And this is an administration where, you know, friends get good treatment. Absolutely. I totally agree with you there, Scarlett. I think, you know, the Murdochs obviously have this really close relationship with the president, with the current administration. The only thing that I would raise here is there is a little element of vertical integration. So Fox obviously owns content in terms of, you know, news, in terms of live sports, access to a lot of live sports properties.

5:22And with Roku, it's really more of distribution, right? Roku has access to 100 million global streaming households, over 50 percent of the U.S. broadband households. So that really gives them that whole distribution arm. And so regulators could make a case that this becomes, again, a case like Comcast, where you have the cable business and you have content. And so, you know, whether there need to be any concessions or whether regulators are going to scrutinize it a little bit more closely.

5:51Geetha Ranganathan:This is kind of, I would say, the coming out party, if you will, for Lachlan Murdoch a little bit here. What's the call there? What's the thought there? Is this a management team that can pull off such a big deal? I think they can. They've been very, very measured, Paul, as you well know, in terms of acquisitions, in terms of M &A, in just terms of general strategy. But we know that they've always been itching to do a deal. They've done small deals much more quietly. and they've had this very eclectic collection of different assets, but really kind of spreading their bases a little bit. So they went out and they got all of these stakes and a lot of sports betting assets, again, kind of identifying all the growth pockets, if you will.

6:38And so I think this deal, obviously, it's a huge deal. They've considered it over a long period of time. And I think they feel like this, with the purchase of Roku, obviously they do get to supercharge their own advertising business pretty substantially. But then again, they also get economics from any streaming platform, right? Because Roku gets paid. They're pretty much like an Apple store. So they get that 30, 35 % cut no matter which streaming service you subscribe to. So I think that Fox was obviously trying to get a part of those owners' economics as well.

7:16Scarlet Fu:Is there any reason to think that someone else might come in with a higher bid? Could this result in any kind of bidding war? So we think so we just ran some numbers, Scarlett, and we think that, you know, the Roku, I mean, the number is actually a little bit underwhelming. So, yes, Fox is paying about a 35 percent premium to where Roku was trading prior to all of this M &A news. But if you just compare some of the Roku profitability numbers, so just this quarter or just a few months ago, they started disclosing their advertising revenue as well as their subscription revenue. And what was more interesting than the breakout of the revenue itself was the gross margin.

7:54So you look at advertising revenue, for instance, it's a 60 percent gross margin business, which is really, really a profitable business, a profitable revenue stream. And then you kind of apply some of the multiples that peers are trading at. I mean, whether it's a Google or a Meta or even a Netflix and Spotify on the subscription side. And we think it's actually slightly undervalued. So maybe almost 30 percent undervalued to some of where those peers are trading. And I think that's what the market is slightly disappointed about today. Both the price as well as the fact that this was not 100 percent cash deal.

8:25So only 60 percent of it is cash. The remaining 40 percent is being paid by Fox stock, Class A stock.

8:33Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. At Brookfield, you can own wealth that's measured in generations. For 125 years, we've built long-term wealth through expertise, discipline, and a clear vision for the future, providing investors access to alternative strategies built for what's next. Brookfield, own what's next. Learn more at brookfield.com. This is not an offer to sell or investment advice. Investing involves risks, including loss of capital. The thing about AI for business, it may not automatically fit the way your business works. At IBM, we've seen this firsthand.

9:10But by embedding AI across HR, IT, and procurement processes, we've reduced costs by millions, slash repetitive tasks, and freed thousands of hours for strategic work. Now we're helping companies get smarter by putting AI where it actually pays off, deep in the work that moves the business. Let's create smarter business, IBM.

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10:46Scarlet Fu:you're listening to the bloomberg intelligence podcast catch us live weekdays at 10 a.m eastern on apple carplay and android auto with the bloomberg business app listen on demand wherever you get your podcasts or watch us live on youtube it's monday means we get some merger monday stuff

11:03Geetha Ranganathan:happening we had a little bit uh mna in the uh tech space today salesforce to buy ai customer service firm Finn for$3.6 billion. What's going on here in the world of technology? Anurag Rana, Bloomberg Intelligence Senior Technology Analyst, joins us here. Anurag, Salesforce buying Finn. First, tell us what Finn is and why is Salesforce buying it? Yeah, we were actually lucky just a few months ago. We had the founder of Finn on our podcast, and we learned a lot from him, actually. This is really, you know, you could see with AI how capitalism shows up. This was an AI native firm which came up with agents.

11:44Geetha Ranganathan:So think about it this way. You want to go to a chatbot, but the chatbot is not tied to a particular software package. This is out-of-a-box chatbot. It would work on any program that's behind the curve. So if you go to, let's say, a healthcare firm and you're trying to solve some issues or customer service issues, and these guys would help you. And that's what they're buying. I think it's a very smart move on Salesforce's part.

12:08Scarlet Fu:I believe Salesforce has its own AI agent tool, AgentForce. Does this perhaps suggest that AgentForce isn't developing or progressing the way that or scaling the way that Salesforce wants it to?

12:21Geetha Ranganathan:I think you're absolutely right. I think this is a signal that maybe AgentForce is only made for the software package that's behind it, which is Salesforce's package. This one is a generic chatbot that can go across the board. So I think that's something that people would need because they're only not looking at the data that resides in Salesforce, but other areas as well. And frankly speaking, these guys have done a phenomenal job of coming up with their own models, own technology that sits on top of some of these systems of record. I think it's also a defensive move by Salesforce because one thing is, if people are buying an out-of-a-box agent from FIN or Intercom, what's it called before, then down the road, you can actually start storing data in their database, you know, then the system of engagement becomes a system of record.

13:11Geetha Ranganathan:And that's not a good thing for Salesforce because that's really their bread and butter. So I think there is a little bit of defensive move as well, but you're absolutely right. I think this would help their agent for practice as well. So stock of Salesforce is up just under 1 % today, but it is down almost 37 % year to date on Arag Salesforce is. And one of the challenges, as you've mentioned to us before, is some of these software companies, software as a service companies, they just got to show that they can compete against AI or compete in a world of AI. Is this acquisition one way for Salesforce to say, hey, we're serious about integrating AI into our products and offerings?

13:52Geetha Ranganathan:No, definitely that's the case. So I'll tell you another company that is in that same realm called Sierra. This is from the co-founder of, I mean, this This company was founded by a guy by then, Brett Taylor, who is the chairman of OpenAI, who used to be a co-CEO of Salesforce. And he was also the chairman of Twitter. In the last one and a half, two years, that company has just taken off. I think the valuation is close to$20 billion. And it does the same thing out of a box, white label agents that can then interact on the behalf. So it's becoming the front office or the front face of some of these apps.

14:31Geetha Ranganathan:And I think with this acquisition, Salesforce can defend itself from somebody like Sierra who can, you know, eventually come out and start taking market share for them. So Salesforce, I think, is a good deal for them that they are more aggressive right at the front of anything AI. And they're not just dependent on their own product agent force.

14:52Scarlet Fu:So Anurag, just kind of looking ahead, do you expect other enterprise software companies like Salesforce to come out and make similar acquisitions? If this is defensive for Salesforce, what does it do to other companies in its field of vision?

15:10Geetha Ranganathan:Yeah. So this wasn't just in the realm of customer service. We call this a CX agent. And there are three private companies here. Sierra, as I said,$20 billion. It's too big for, to be honest, anybody to buy, frankly, from this point, because Salesforce is the biggest when it comes to customer service right now. There is another company called Dekacon, which is, I believe the last valuation was somewhere around$8 billion. But the question is, who's going to actually buy them? Because the natural buyer would have been Salesforce. And the third one was Intercom in that framework.

15:41Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this.

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18:20Scarlet Fu:Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. I want to focus on Anthropik here, Paul, because there's some big news about how the company was ordered to bar access, foreign access to its best AI models, ordered by the government, in fact.

18:42Geetha Ranganathan:Yeah, that doesn't seem like a good development for them. Particularly if you're thinking about going public.

18:47Scarlet Fu:Exactly. So let's bring in Mandeep Singh. He's our global tech research head here at Bloomberg Intelligence. And Mandeep, just give us some context for this latest news. Anthropik has, it seems like, run into situations where the U.S. government keeps getting involved in figuring out or determining who has access to its AI models. Yeah, I mean, look, they were labeled as supply chain risks before, and now this happened after they commercially released their METOS model. And look, I think the concerns are around the ability to jailbreak the model, which everyone talks about as having capabilities that go well beyond the frontier models that we have seen, you know, around coding agents or image generation and those type of things.

19:38But the METHOS model specifically has a lot to offer in terms of finding vulnerabilities, which is why all the cybersecurity companies were involved in testing the model under Project Glasswing. And in this case, I think Entropic just needs to work closely with the U.S. government, which clearly is keen to regulate, you know, Entropic and probably other frontier models. And I think they're walking a very fine line in terms of really being branded as supply chain risk first and then releasing a model without really getting approvals from the government.