Comcast-NBC Deal, What is Comcast's End Game?
It looks like that the merger deal between Comcast ( CMCSA ) and NBC Universal owned by General Electric ( GE ) will finally go through. However it may face net-neutrality terms for several years in order to prevent any anti-competitive behavior as Comcast would command a significant amount of content. Comcast competes with satellite pay-TV providers like Dish Network ( DISH ) and DirecTV ( DTV ), cable companies like Time Warner Cable ( TWC ), and telecom operators like AT&T (T) and Verizon (VZ).
Our price estimate for Comcast stands at $25.24 which is about 12% above the market price.
The deal is significant since it amounts to almost half of our value estimate for Comcast. So what does this deal mean for the company?
Numbers on the deal
The joint-venture between GE and Comcast will combine Comcast's cable networks (like E!, Golf Channel and Versus) and its regional sports networks with GE's NBC Universal which owns cable channels such USA, CNBC, MSNBC and Bravo. The new joint-venture company is valued at $37.25 billion and Comcast will have a 51% stake with GE holding the remaining 49%. NBC Universal is valued at $30 billion and Comcast's contributed programming segments are valued at a total of $7.25 billion.
Possible strategic thinking
Let us start by pointing out that there are very little if any cost synergies. Comcast has stated earlier that 99.9% of NBC Universal's employees are in businesses that don't overlap with that of Comcast, and thus the potential of existing cost synergies is very low.
Profits - One of the obvious reasons that Comcast sees is control of the content that it delivers. The company tried to takeover Disney (DIS) many years back but failed and this joint venture looks like a more cautious and softer move. The control of media content can possibly allow the company to gain distribution advantage over other pay-TV providers in terms of bolstering its own on-demand content and by earning income on content it allows others to carry. Disney has spoken up regarding its concerns on the deal and some are concerned Comcast will favor its own content in its distribution arrangements.
Threat from online platforms - The threat from online platforms like Netflix (NFLX), Apple's iTunes (AAPL) and others is also visible and Comcast wants to put brakes on some of the customer losses it has experienced. Comcast will look to target customers who might potentially "cut the cord" who are attracted to are the improvements in online content. It can do this by establishing a better online presence through NBC, which carries its shows online and has a stake in Hulu.
Cable rich network - We should note that NBC's cable networks like USA, Bravo, SyFy, CNBC and MSNBC along with Comcast's cable networks are estimate to constitute close to 82% of the joint-venture's cash flows. Thus, less reliance on broadcast network and more reliance on stable cash flows from cable networks is a lucrative opportunity. Cable networks have thrived during economic downturn due to heavy reliance on subscription based revenues.
… but there are net neutrality checks
Comcast will be banned from engaging in anti-competitive practices like blocking the competitor content or prioritizing its own services like Hulu. Additionally, the company can not use its set-top boxes or other hardware to intentionally channel its customers towards its own content at the cost of competitor content.
These checks are likely to limit the advantage that Comcast can take. Additionally we think that there are other broader issues of high cable bills and bad customer service that might need to take priority.
Do you think that the customers might view Comcast's deal positively? Do you think Comcast can halt its declining pay-TV market share with the deal? You can modify the forecast below to see how change in market share impacts the company's price estimate.
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