One of the ways I keep up on all things media is through a Google email alert on Providence Equity, which is the major media focused private equity firm. An alert I received yesterday contained a link to an article discussing a note that Bernstein put out last week mentioning Comcast (CMCSA/CMCSK) as a perfect candidate for a private equity led buyout. The purpose of the Bernstein note was not to suggest that Comcast would go private but rather to note that if the numbers worked so great for private equity then the stock was probably significantly undervalued. If there is anything regular readers of Street Insight know it is that I am bullish on Comcast so this I find angle on the bull case especially interesting.
This is really just an intellectual exercise as Comcast has an $80 billion market cap and about $30 billion in debt. It seems like private equity can finance anything these days but a deal of that size, before considering any premium, seems impossible. Then again, with all the liquidity floating around it could probably be financed. My spread sheet has Comcast generating $12.1 billion in EBITDA this year. I’ve seen plenty of private equity deals with debt to EBITDA at 8-9 times. Bernstein suggested banks would lend at 8.5 times, which works out at $102 billion in debt. Against Comcast’s current enterprise value of $110 billion that would leave the need for just $8 billion in equity before any premium….

Interest expense on $102 billion in debt might be around $8 billion. Subtract capital spending, working capital, and cash taxes and Comcast would probably have a modest cash shortfall in the first year or two of a deal but with EBITDA growing at 14% per year over the next three years (as guided by management two weeks ago) and free cash flow growing by 20%, by the third year, Comcast could start paying down debt.
According the article referencing the Bernstein research, debt could be less than $100 billion in five years while EBITDA would be around $18 billion. Put an 8 multiple on $18 billion and deduct $100 billion in debt and the equity value of Comcast would be $44 billion against the theoretical equity value today in a private equity led buyout of just $8 billion.
In other words, at current prices, Comcast looks awfully cheap in a private equity model. And as Bernstein’s excellent analyst, Craig Moffett, noted, if it is that cheap to private equity today it must be severely undervalued in the public market. Do I hear a massive share repurchase and/or a large special dividend or meaningful recurring dividend coming?
As my good friend Doug Kass likes to say, “Makes me go hmmm.”