With NBC Deal Done, Comcast Becomes the New Cable Juggernaut

Comcast Corp. (Nasdaq: CMCSA) will acquire a 51% stake in General Electric Co.’s (NYSE: GE) NBC Universal Inc. for $13.75 billion in cash and assets, giving the cable giant lucrative cable channels including SyFy, Bravo and the USA Network, as well as Universal Pictures and its related theme parks in California, Florida and Japan.

But for GE, the deal is a precursor to and eventual exit from the media business.

"This isn’t just one of the biggest media deals, this is arguably one of the biggest M&A deals in years," Wunderlich Securities Inc. analyst Matthew Harrigan, who recommends buying Comcast shares, told Bloomberg News.

In a move to assure investors this isn’t another AOL-Time Warner (NYSE: TWX) merger, Comcast increased its dividend by 40% and will finish its $3.6 billion stock repurchase program in the next three years. The company’s shares were up 6.49% in trading, closing at $15.91 per share yesterday.

"This is not expansionism a la conglomerates of the past in media," media mogul and IAC/InterActiveCorp (Nasdaq: IACI) Chairman and Chief Executive Officer Barry Diller said at the Reuters Global Media Summit on Wednesday. "This is a very disciplined, very smart group with huge resources in their cable, telephony, data businesses that is doing this with an absolute sense of strategy."

NBC’s cable channels have been the main drivers behind its profitability this year, helping it post an operating income of $1.7 billion with sales of $11.2 billion in the first nine months of the year, despite weakness at its fourth-place broadcast network, movie studio and theme parks. 

"If [Comcast is] able to turn NBCU around creatively, put a tight collar on the studio and the broadcast network and the ad market improves, this could be a pretty good transaction," Wunderlich’s Harrigan told Bloomberg.

Providing the Wires Wasn’t Enough…

As Money Morning reported in an analysis last month, the deal gives Comcast a hedge against increasing competition for its television subscribers. The cable giant enjoyed decades of practically no competition until the mid-1990s, when satellite operators like The DirecTV Group (Nasdaq: DTV) started chipping away at Comcast’s tens of millions of subscribers. Then in the middle of this decade, fiber optic-based carriers such as Verizon Communications Inc. (NYSE: VZ) came on to the scene, exacerbating a nagging problem Comcast already had with DirecTV.

With NBC in the fold, Comcast will expand its still-tiny advertising take via NBC’s cable lineup, which currently accounts for just 3.6% of sales. Several of these channels include well-performing original shows, which pundits say NBC doesn’t have enough of on its broadcast network.

NBC’s over-the-air network telecasts numerous reality shows like "The Biggest Loser" and programs such as "The Jay Leno Show" in the 10 p.m. hour five days a week, which, despite its low cost, is losing big in the ratings to the likes of crime dramas like "CSI: Miami."

Comcast will also gain from the sales of programming to the very rivals it competes with. Still, don’t expect it to leverage its position with competitors; Comcast will likely have to make concessions to appease regulators, such as sharing its Philadelphia regional sports programming.

As the United States’ largest cable provider, Comcast anticipates high regulatory hurdles and is taking a proactive stance. In an open letter, the company said it would make a number of public interest commitments in its filing with the Federal Communications Commission (FCC) and other government bodies.

One such commitment is to keep the over-the-air NBC network free, scotching pre-deal fears to the contrary.

"Notwithstanding the turbulence in the current media marketplace and the ongoing threats to the business model of a national broadcast network, the combined company remains committed to continuing to provide free over-the-air television through its O&O [owned and operated] stations and through local broadcast affiliates across the nation," wrote David L. Cohen, an executive vice president at Comcast.

Despite the expected vigorous questions for Comcast and GE officials by regulators, antitrust experts expect the deal to pass.

A Better Environment for GE?

For GE, the deal will take it one step closer to returning to its core business of making heavy equipment such as electricity-generating turbines, and a better cash position, including the $8 billion Comcast will pay it when the deal closes.

The company is also expected to exercise its option to cash in its remaining 49% stake over seven years.

"Having (cash) sit on the balance sheet, given all of the uncertainty in the economic environment, is not a bad thing," said Steven Winoker, an analyst at Bernstein Research told Reuters. "Right now it pays to be conservative given all the economic uncertainty that's hanging out there."

GE tried unsuccessfully last year to divest its appliance and credit card businesses, and with the ink dry on the NBC deal and the environment for mergers & acquisitions (M&A) improving, the company could try again to unload the units, but executives say there’s no plans to do so.

"I would really look at the portfolio today as being very stable," after the deal closes and the company completes its restructuring of GE Capital, Chairman and CEO Jeffrey Immelt said in a conference call yesterday.

Still, Bernstein’s Winoker didn’t rule out another try at selling additional units.

"That’s what you have to say at this point in time, until you have another exit path," he said. "Arguably it’s no more attractive as a business today than it was a year ago."

GE will get almost $6.5 billion from Comcast between signing and closing, and contribute its programming businesses and certain other properties valued at $7.25 billion. NBC will borrow $9.1 billion to give to GE, which will pay $2 billion for 38% of Vivendi SA's NBC stake if the merger isn’t closed by September.

Immelt expects to get regulatory approval for the deal within nine to 12 months, making it likely the conglomerate will pay for the Vivendi stake. Shares of GE fell 0.44% yesterday, closing at $16.00 per share. 

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