ADverse: Analysts, Cable Execs Say Comcast/NBC Universal Deal Makes Perfect Sense

Investors appear to be giving the cold shoulder to a potential tie-up between Comcast and NBC Universal. Comcast’s stock at midday was trading down 7.5% at $14.86, against a wider market fall.

Still at least some cable executives think if Comcast does turn talk into an official bid for NBC Universal it could be the steal of the century, even at the $35 billion price tag that has been rumored.

One highly placed cable executive observed, “The deal makes all the sense in the world. Look at Disney. Comparatively it would be a bargain; a win-win. The answer to the question of whether it’s content or distribution is, that it’s both.” Comcast made an unsuccessful $66 billion bid for Disney five years ago. (See related story: Comcast Launches Hostile Bid for Disney)
In July 2008, NBC Universal together with two private equity partners paid $3.5 billion for The Weather Channel, a single cable channel, albeit with a significant web presence.  NBC Universal’s assets could command a 30-40% premium, said one analyst. A $35 billion purchase price works out at 10 times 2010 EBITDA. Other media conglomerates currently trade at seven times 2010 EBITDA.

Bernstein Research outlined a number of reasons such as deal would make sense for Comcast. A report out October 1, from senior media analyst Michael Nathanson suggests that this potential acquisition could be hedge against the rising cost of programming to third party distributors. Nathanson wrote, that affiliate fees were, “set to rise further as broadcasters aggressively go after the $3.3 billion in DVR fees that consumers are paying to video distributors.”  CBS and News Corp have also been making noise about seeing payments for their broadcast networks. A deal could also ramp up efforts to make Video on Demand a destination for viewers and help nuke the impact of DVRs, which have wreaked havoc on the ad supported model.  What Comcast might want to do with Hulu is another question. The popular and consumer friendly Web site may yet end up replacing Comcast’s more modestly successful website Fancast, if a deal were to take place.

Another possible outcome of a tie-up between the two companies: a joint Comcast/NBCU bid for the TV rights for next set of Olympic Games? A decision on whether Chicago will be a host city in 2016 is expected this week. A U.S. host city would make the rights more attractive to American broadcasters, and with strong competition for rights expected from Disney-ESPN, NBC Universal may need to up its game. (Sidenote: Comcast recently backed away from its support of a separate USOC Olympics channel, after complaints from NBC Universal and the IOC.)

Comcast’s interest in going after content has long been the subject of media speculation as well as investor fears. In August former Disney chief Michael Eisner told Broadcasting & Cable’s editor Ben Grossman, “Comcast won’t just be sitting there; they may want to recapture their dreams of going after Disney, but not with Disney specifically. And I am sure Brian Roberts and Steve Burke have Time Warner high on their computer screens. Now, I have zero information about this whatsoever. But anyone paralyzed in a distribution business absolutely should be looking at high-end content.” Even before the Beijing Olympic Games Comcast was rumored to have an interest in NBC Universal. The company’s chief operating officer Steve Burke confirmed the firm’s interest in acquiring content at a recent investor conference.

The news has the entire TV industry dissecting what a possible deal might mean for their businesses. In a staff memo, NBC Universal CEO Jeff Zucker wrote, “Vivendi has been a superb owner of NBC Universal, along with GE, for more than five years. They have not yet made us aware of any final decisions about their future with us; should they choose to exit, there are a number of possible things that could happen. It is our longstanding policy not to comment on rumors, and we have adhered to that policy in connection with these rumors.”

Analyst Steve Winoker who follows General Electric, at Bernstein Research told Broadcasting & Cable: “For GE a deal at a high price with a healthy acquisition premium could be very beneficial.” For Comcast to simply acquire the 20% of the company held by Vivendi does not make sense, since it would leave Comcast with all the complicated burdens of ownership but none of the benefits. Winokur speculates that such as transaction would be unlikely unless Comcast were given first right of refusal to acquire the remaining 80% of NBC Universal at a later date.

In a note out October 1, Winoker concludes, “We expect investor reaction to be strongly negative. Investors have long pressed Comcast for an aggressive return of cash to shareholders. An acquisition of a major content studio, even if consummated at an attractive price is most decidedly not what Comcast investors had in mind.”