Comcast to Wall St.: NBCU Deal Driven by Recession-Proof Cable

No big changes are expected for Hulu...for now
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Comcast senior management told Wall Street analysts last week that their deal for NBC Universal is about taking a bigger share of the recession-proof growth story that is cable content. Cable channels will account for 82% of the cash flow of the new NBC Universal entity, the executives said.

Comcast announced Dec. 3 it has a deal to acquire a controlling interest in General Electric's NBC Universal. Comcast will pair NBCU with its own cable channel assets, which include E! Entertainment. NBC Universal houses scores of cable channel brands from top performing USA Network, Bravo and Syfy, to news services CNBC and MSNBC among others.

Brian Roberts, CEO at the Philadelphia-based cable operator, predicted that cable revenue would continue to grow significantly. Affiliate fees have been growing at 12% per year, while advertising sales have been growing at 7% per year due to increasing ratings. Roberts pointed out that NBC Universal has five channels each with more than $200 million in operating cash flow.

In a slide, Comcast showed analysts just how well NBC Universal's cable channels have been managed for margins. The compound annual growth rate of those cable channels is 16% over the past five years, while Comcast's cable channels have grown 10% over the same period. Comcast's Chief Operating Officer Steve Burke said: “Even if affiliate revenue goes up in the mid-single digits then it's still a solid leg of the stool.”

Burke said Comcast's bet is that affiliate revenue and advertising revenue will both continue to rise. “It's hard to think of a better business in media with better fundamentals,” Burke said. The executives reiterated that NBC network would be used to cross-promote those cable channels more extensively.

NBC Universal's non-cable assets, which include the broadcast network, the studio and theme parks, have Bernstein Research senior analyst Craig Moffet a little concerned. According to his company's analysis of financials revealed by the deal published Dec. 4, Bernstein projects NBC Universal's non-cable assets will see a 66% year-on-year drop in earnings in 2009 and a further 31% drop in 2010. That is worse than Bernstein had anticipated according to the report.

The Bernstein report also points out a curious aspect of the deal: “Comcast is being credited with a portion of the cash flows of NBCU for a year before the deal closes—a period in which Comcast will own none of the equity.” Bernstein analysts also note that Vivendi will retain its 20% stake in NBC Universal until the deal closes, which could take as long as a year.

Meanwhile, all eyes are on how Comcast will exert its influence at Hulu, in which NBC Universal owns a third stake. Comcast's Burke said Hulu would likely continue to represent broadcast network shows while cable shows would be available via Comcast's online services, which include Fancast.com. “Those strategies are smart and appropriate. We see a lot of content going to Hulu and being available for free and cable content being on TV Everywhere. Hulu and TV Everywhere are complementary,” said Burke. TV Everywhere is the name given to shows made available on other platforms via a password given to pay-TV subscribers.

The executives refused to be drawn on whether the new entity would create big competition for ESPN, saying simply there's room for two. They also had little to say on future Olympic bids, except to say that was GE's call. North American TV rights to the 2014 and 2016 games are not yet assigned.

Comcast's stock price closed at $15.91 on Dec. 3, the day the deal was announced. That was up on the previous day's close. The stock closed up a bit further Dec. 4 at $16.07. Comcast's 52 week range is $11.10 to $18.10.

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