(Rewrites, adds analyst comment, Breakingviews link and background on Fox entertainment assets, updates shares)
July 19 (Reuters) - Comcast Corp dropped its $66 billion bid for Twenty-First Century Fox Inc's entertainment assets on Thursday but said it would still try to buy European broadcaster Sky Plc to increase its international footprint.
Comcast's withdrawal is a concession to Walt Disney Co , which last month sweetened its offer for the Fox assets to $71.3 billion. It de-escalates one of the media industry's most high-profile confrontations, which pitted Comcast Chief Executive Brian Roberts against Fox Executive Chairman Rupert Murdoch and Disney CEO Bob Iger.
However, it still leaves open a potential bidding war for Sky, which is 39-percent owned by Fox. Fox has also made an offer for the 61 percent of Sky it does not own, although Comcast is currently the highest bidder with a 14.75 pounds-per share-offer, worth $34 billion, for the London-listed pay TV group.
Shares of Comcast were up 3 percent as investors were relieved that the company did not try to outbid Disney for the Fox entertainment assets. Disney shares also rose 3 percent.
Fox shares fell 1.7 percent and Sky was down 2.6 percent. One of the reasons Comcast dropped its bid for the Fox assets was that the bidding war was inflating the value of Sky, given its partial ownership by Fox, according to sources familiar with the company's thinking.
"(Fox and Sky) were good, valuable assets worth pursuing, but ... they werent necessary for Comcast," said Jonathan Chaplin, analyst at New Street Research. "Walking away from the battle for Fox at this price we think supports the view that they are fine without it. It remains to be seen how Sky wraps up, but we think it is highly unlikely that they would bid up to a price that would suggest desperation."
Based on Fox's partial ownership of Sky, Britain's takeover regulator last week set the floor for a new Disney bid at 14 pounds per share, which is below Comcast's latest bid. The regulator is set to revisit that decision on July 27, and Disney is waiting until then for its next move, according to the sources.
Bernstein analysts have said Disney's debt pile could now hamper its ability to take on Comcast with a new bid for Sky, partly because it will need to invest even more to launch a successful direct-to-consumer streaming platform.
Disney and Fox did not immediately reply to requests for comment.
Comcast also decided to drop its bid for the Fox assets because it was concerned the price was becoming too high, even though its banks had authorized a potential increase and were ready to finance a new bid, according to the sources.
Comcast was also worried about how much revenue it would lose in divesting some of the Fox assets to appease U.S. antitrust regulators, according to the sources. Beyond Fox's regional sports networks, the Fox deal would complicate Comcast's investment in TV streaming service Hulu, of which it is a partial owner, alongside Comcast, Fox and Warner Media Group, now owned by AT&T.
Immediately before the acquisition by Disney, Fox will separate the Fox Broadcasting network and stations, Fox News Channel, Fox Business Network, its sports channels FS1, FS2 and the Big Ten Network, into a newly listed company that it will spin off to its shareholders.
Disney owns ABC, Pixar, Marvel Studios and "Star Wars" producer Lucasfilm, plus an array of theme parks. The Fox assets being acquired include a cable group with FX Networks, National Geographic and 300-plus international channels, plus Fox's stake in Hulu.
SKY'S THE LIMIT
The bidding between Comcast and Disney is part of a bigger battle being waged in the entertainment industry as the world's media giants splash out tens of billions of dollars on deals to be able to compete with Netflix Inc and Amazon.com Inc .
While an acquisition of Britain's Sky, a broadcaster of sports, films and TV shows to 23 million homes across Europe, would significantly diversify Comcast's business overseas, it would do little to give it scale in its core U.S. market.
Comcast was drawn into a bidding war for Fox because of the scarcity of big media assets up for sale, given that the industry is dominated by powerful families and personalities reluctant to cede control. CBS Corp and Viacom Inc , for example, are tightly controlled by the Redstone family.
However, smaller media companies could become acquisition targets. Lions Gate Entertainment Corp rose 5.2 percent on investor speculation it could become an acquisition target. Sony Pictures Entertainment Inc and MGM Studios Inc are also seen as potential targets.
Comcast first made an offer for the Fox entertainment assets last November, but Fox decided to go with Disney, even if its bid was lower, because it believed a deal with Comcast would not win antitrust approval. The U.S. Department of Justice last month approved Disney's deal with Fox.
(Reporting by Munsif Vengattil, additional reporting by Sheila Dang; Editing by Bill Rigby and Nick Zieminski)