Is Comcast Nearing NBCU Deal? – Analyst Blog

Is Comcast Corp. (CMCSA) on the verge of getting regulatory approval to acquire a controlling stake in NBC Universal (NBCU)? A recent change at the helm of NBCU indicates this. Yesterday, Comcast and General Electric Co. (GE), the current owner of NBCU said in a joint statement that the existing COO of Comcast, Mr. Steve Burke will succeed the incumbent CEO of NBCU Mr. Jeff Zucker by 2010 end.

 

On December 3, 2009, Comcast declared that it had agreed to purchase 51% stake of NBC Universal from General Electric for approximately $13.75 billion. Comcast will pay $6.5 billion in cash and contribute cable channels worth $7.25 billion for its 51% stake in NBCU. General Electric will hold the balance 49% and will have the option to sell half of its stake in NBCU after three and half years and the remaining stake after another three and half years.

 

The deal is still going through the regulatory approval process though Comcast expressed confidence that the proposed merger will be approved by the Federal Communications Commission (“FCC”) before 2011. Regulatory approval will transform Comcast into an integrated media mogul from a cable MSO. The company will be able to serve one-fourth of the U.S.’s pay-TV households supported by a large content-creation empire. NBCU includes the flagship NBC TV network, the Telemundo Spanish-language network, Universal Pictures and theme parks, and about two dozen cable channels.

 

Despite being the largest cable MSO in the U.S., Comcast is facing severe competition in its core basic video segment and lost 347,000 subscribers in the first half of 2010. In fact, the cable TV industry is facing a massive competitive threat from FTTH networks of telecom giants and cheap-rate service plans of satellite TV operators. Furthermore, in recent days, Netflix Inc. (NFLX), Apple TV of Apple Inc. (AAPL), and Google TV of Google Inc. (GOOG) are offering online services that will enable viewers to stream movies and TV shows over the Internet and watch on television screens.

 

In order to overcome this threat, Comcast is desperately looking to get hold of a vast content library to expand its own video-on-demand opportunities. With the video-on-demand service, the company is trying hard to arrest the flight of basic video subscribers to alternative pay-TV service providers or to the Internet. We believe the immediate task of Mr. Steve Burke will be to lift the viewership rating of NBCU which is currently behind CBS Corp. (CBS), News Corp.’s (NWSA) Fox Network, and Walt Disney Co.’s (DIS) ABC.

 

Despite this, we believe the acquisition of a controlling stake in NBCU will largely benefit Comcast. Firstly, the company will be dependent less on TV channels for broadcasting. Secondly, although NBCU’s TV channels failed to deliver, stronger performance by its movies and theme park sales helped the company to improve its financials in the most recent June 2010 quarter. Thirdly, advertising revenues will boost significantly. Comcast estimated that it could go up from the current level of $2.5 billion per annum to $10 billion per annum.

 

We maintain our long-term neutral recommendation for Comcast. Currently it is a short-term Zacks #3 Rank (Hold) stock.