« M&A Back in the Forefront of Media Investing | Main | October 2009 Models: Small Cap Run Ends, Mid Cap Favored »

October 02, 2009

Iniital Thoughts on Comcast-NBCU Merger

One of my most important reactions to breaking news or rumors is to get my thoughts down on paper. This allows me to organize my ideas, determine questions and get a handle on how the stock market may initially react to the news.

I've written recently about how mergers and acquisitions have returned to the forefront of media investors' minds. I have also noted that I thought there would be more M&A activity than most observers think as long as credit markets remain open and stable. Certainly, the rumored deal for Comcast Corp. to buy NBC Universal Inc. supports the view that media M&A is back.

My closest confidante in media stocks sent me an e-mail almost as soon as Sharon Waxman of The Wrap broke the story that Comcast had a deal to buy NBC Universal. Comcast denied it had a deal but clearly left the door open to the possibility that they were in negotiations.

Anyway, here is my "thinking out loud response" to my friend's e-mail:

Comcast will surely trade off of this. As will Time Warner Cable Inc. and Cablevision Systems Corp. Time Warner Inc. will likely trade up, and it might give a boost to Walt Disney Co., Viacom Inc. and News Corp., depending on valuation. I'd have to think a deal this size is good for the group multiples. Discovery Communications Inc. and Scripps Networks Interactive Inc. will clearly be viewed as in play now. Of course, no one has to do anything to get bigger to battle Comcast/NBC Universal, because the synergies are horizontal rather than vertical. In other words, Comcast would be folding in assets in areas where it only has minimal operations, thus the competitive landscape changes less than might be perceived.

The question I guess is whether Comcast controlling this much content alters the landscape in a digital world. On the one hand, it changes little, since Comcast has limited exposure to content now. Just a different owner for one of the majors. On the other hand, does the marriage of content and distribution finally make compelling sense due to digital distribution? I really don't know.

Back in Telecommunications Inc. days when you could still build value via launching new analog cable channels, distribution could create value out of content. Then you had Time Warner even before AOL LLC, which is basically what Comcast/NBC Universal is except for Comcast has a broadcast network and local TV stations. The marriage of cable and content at pre-AOL/Time Warner never produced anything special.

What about regulations? Didn't there used to be regulation preventing cable systems and TV stations from being owned in local markets? [Edit: I have since learned that these expired a few years ago]. I assume Comcast would not be far along in a deal for NBC Universal if that were a problem, as there is no one on which to unload the broadcast assets unless allowing one entity to own two broadcast nets were allowed.

More importantly, given the market position of this entity, regulators, especially Obama regulators, are going to be all over it as far as taking advantage of whatever digital plans they will have. I see that as a big negative for this deal from Comcast's perspective.

Can Comcast borrow $35 billion? Giving General Electric a huge piece of Comcast equity creates future supply as GE will have an out, a la Vivendi. You may as well go all in and leverage up, hoping that if the deal works, the deleveraging provides the bulk of the returns to common shareholders.

Those are just some first thoughts that popped into my head. They could be way off base, but I like to think aloud when stuff like this happens.

Reading that over in the light of morning and after scanning some press reports on the rumors, I do not have much to add. The only thing that comes to mind is that Comcast's On Demand Online initiative could be at odds with Hulu, which is partially owned by NBC Universal and has been a major success. This is the sort of conflict that will raise serious issues with regulators should Comcast take ownership of or a major stake in NBC Universal.

Disclosure: Discovery Communications is widely held by clients of Northlake Capital Management LLC, including in Steve Birenberg's personal accounts.

Posted by Steve Birenberg at October 2, 2009 08:59 AM in Comcast