Whispers, speculation, and rumors are swirling about a possible deal linking Comcast (NASDAQ:CMCSA), the nations largest cable provider, and NBC Universal, majority owned by General Electric (NYSE:GE). Thus far the deal has been panned by Comcast investors and the stock has slid about 5% since they confirmed that there had been talks surrounding a deal. In the beginning, it appeared that Comcast would want between a 20% and 50% stake in the company, but now the predominant theory is that NBCU would be spun off and Comcast would take a 51% controlling interest.
If an offer does materialize, we will be very interested to see whether it attracts a lot of attention from regulators; odds are it will. Comcast is the largest cable company with about a 25% market share in the U.S., and already has some small cable networks that it controls. However, NBCU is a huge network (NBC, Bravo, USA Network, CNBC, MSNBC and Telemundo, among others)and could present many more anti-trust issues. The deal would have to include terms allowing NBC’s content to be available on competing television service providers like DirecTV (NYSE:DTV) and Verizon (NYSE:VZ) and others.
“I think the potential for more deals like that certainly is really ripe because, you know, a lot of media companies values are depressed right now so it means opportunities for putting together unusual partnerships and alliances. If Comcast and NBC Universal were to put their properties together though, I think there’s going to be a hail storm of protest from various government agencies. You’re taking a lot of concentration of power both putting programming together with Comcast programming assets and NBC Universal’s, together with Comcast distribution that’s going to create all sorts of problems for them.” — Fox Business Network 10/2/2009
Of course, television programing would be the largest area of concern for regulators, but there are many other media assets they would gain through a joint venture in NBC Universal. With advertising rates and DVD sales slumping in this recession, NBC is probably quite cheap compared to where it has historically been valued, and Comcast CEO Brian Roberts is never one to shy away from a good opportunity. The deal has been described by insiders as being in the preliminary stages, but the clock is ticking. Vivendi, which owns 20% of NBCU, is investigating dumping their stake, but they have an annual window from Nov. 15th through Dec. 10th in which contractually they are able to sell their stake.
Should Comcast make this move? We think that at the right price it would be worth the trouble. However, for a deal with this many moving parts, there is some doubt as to whether they can make it all happen in the next few months. Furthermore, if they do decide to make the move, they are risking the fact that the regulators will allow it. The initial reaction from analysts and the market has been quite negative, but that does not necessarily mean it isn’t worth doing. Based on the current valuation, we believe Comcast is Greatly Undervalued, but that analysis is subject to change should this deal materialize. Comcast has done a good job paying down debt over the last few years, and this move would undoubtedly take that effort a step back.