Comcast’s NBCU spinoff raises expectations for M&A. there are no good options

Analyst’s thoughts comcast This is a prime mover for trade. Comcast executives say they’re wrong.

On Monday, the company announced plans to separate its two main businesses: cable broadband and the NBCUniversal/Sky media division. This is the second major structural change for the decades-old company in recent months, raising questions about the viability of future deals for either half of the company.

But during a call with investors to discuss the split, Comcast executives were prepared to throw cold water on them.

“Absolutely not,” Comcast co-CEO Brian Roberts said Monday when asked whether investors should view the separation as a potential preparation for a future deal.

Comcast said Roberts, the son of founder Ralph Roberts and Comcast’s controlling shareholder, will not serve as CEO of the two companies after the separation, but will remain “actively involved” in the management teams of both companies.

“This is the right move to put each company in the strongest position to create value, fully monetize its assets, and aggressively pursue its own organic growth strategy,” Roberts said.

Co-CEO Mike Kavanaugh similarly denied it, saying, “On NBCUniversal and Sky’s side, that’s absolutely not the case.”

Why does Comcast shoot down acquisition speculation? There may not be much good left.

Wall Street and industry insiders have long called for Comcast to be broken up, citing the rise of streaming and stiff competition in the media industry.

Executives have discussed the separation at various points since at least 2019, but executives had never seriously considered it, according to a person close to the situation who asked not to be identified because the discussions are private.

Less than two years ago, when Comcast decided to siphon its cable TV network into another publicly traded company, the spinoff would eventually become the parent company of CNBC. Versant Media Group — The prospect of carving out the entirety of NBCUniversal never came up, the person said.

Instead, a move to separate NBCUniversal and Sky from the Xfinity cable business came together fairly quickly in recent months, people said.

Mike Proulx, director of research at Forrester, noted that Wall Street just witnessed a large media deal in response to the announced spin. in front warner bros discovery starts the sales process, resulting in Netflix and paramount skydance, WBD said it plans to split its assets between two companies.

“Comcast is following the strategy we’ve already seen. Warner Bros. Discovery split up as it moved into a deal with Paramount. Now Comcast is doing the same thing with NBCUniversal. History is important here as Peacock makes an acquisition of NBCUniversal more likely,” Proulx said.

This spin-off comes against a backdrop of extensive consolidation. Paramount Skydance itself is the product of a merger that completed just over a year ago. Immediately after closing, confrontation with streaming giant Netflix For WBD assets.

Smaller deals are also coming to market as the media industry grapples with changing consumer habits. Early this month, fox Agrees to acquire streaming platform company Roku For $22 billion. And broadcast station owners are rushing to consolidate in order to gain scale.

With the exception of its bid for WBD, Comcast has distanced itself from M&A and focused on its own business.

“It’s no surprise that competition in the media and communications industry continues to intensify and the pace of change continues to accelerate. We do not expect these conditions to change anytime soon,” Kavanaugh said on Monday’s conference call.

Comcast said Cavanagh will become CEO of the company’s media business.

“Our plans for NBCUniversal and Sky are to build and invest for growth. We have great ambitions to pursue opportunities that keep us ahead of evolving consumer behaviors and viewer demands. And we now have the freedom to explore adjacent businesses that we have the right to be a part of,” Cavanagh said.

The motivation behind breaking up a company is often to open up more trading opportunities. Still, it’s unclear what kind of deal the newly formed company from NBCUniversal and Sky’s assets could consider without significant regulatory challenges.

One example is the residential broadcasting network NBC, which creates various obstacles. The company cannot merge with another company with a national network, effectively disneyABC owner, CBS owner Paramount Skydance is off the table.

Even if you take broadcasters out of the equation, it would be impossible to sign a deal with Paramount Skydance, which has been on a buying spree under new CEO David Ellison after the deal with WBD is completed.

Fox, the remaining major player in linear TV, has been moving away from traditional media since selling its entertainment assets several years ago, and likely won’t have any appetite for a new deal after the Roku deal.

During the WBD sales process, Netflix indicated that it was open to deals for suitable assets.

But Netflix’s interest in WBD has been in its own movie studio and streaming properties, ignoring WBD’s linear network. Despite having major sports assets like the NFL’s Sunday Ticket, the NBA, and top-tier movie content, it’s hard to imagine Netflix making such a pivot and entering linear TV through a hypothetical deal with NBCUniversal.

As a result, there is little else to discuss when it comes to media deals, with major companies doing almost all the talking. Comcast did not disclose post-spin valuations for the companies as of Monday, but between Universal’s theme park business, small but substantial streamer, and well-regarded content library, NBCUniversal may be too big for smaller players to swallow.

A similar scenario can occur on the cable side.

The Comcast assets that remain after the spinoff (Xfinity branded broadband, mobile and pay TV) have gone from rapid growth to stagnation, often losing broadband customers each quarter as competition from wireless and satellite providers increases.

The market immediately rewarded the stock. charter communicationsanother cable giant in the midst of completing another acquisition, Monday after Comcast’s announcement.

Charter shares soared 10%, suggesting investors may be backing a potential merger that would unite Comcast and Charter, two of the largest cable companies in the United States.

Charter and Comcast have invested heavily in their broadband networks and mobile businesses despite increased competition. They are part of a joint venture that allows Charter cable TV customers to use Comcast’s Xumo streaming devices.

Companies also aggressively changed their pricing packages to pursue and retain customers. However, these moves have had little impact on the stock prices of either company.

There are several historical precedents that have given Wall Street hope for a possible deal. Comcast attempted to acquire Time Warner Cable in 2014. When Comcast withdrew its bid following regulatory opposition, Charter Corp. (then the nation’s second-largest U.S. provider) scooped up the assets. Most of today’s charters were once Time Warner Cable.

Still, there’s reason for skepticism, said Moffett Nathanson analyst Craig Moffett. The Department of Justice was prepared to block the Comcast-Time Warner Cable deal. Even if Comcast’s charter agreement were approved by the federal government, it would need state-by-state approval, which may not be easy in Democratic-controlled states such as Massachusetts, Illinois and Maryland, Moffett said in an interview.

“It would have to go through the hoops of separate state civil service commissions,” Moffett said. “There’s probably going to be pretty staunch opposition in blue states that traditionally oppose mergers like this.”

The combination also comes with a huge debt burden, according to people familiar with the matter.

Charter is in the process of merging with Cox, which would leave it with more than $100 billion in debt if it assumed Cox’s debt. In a move aimed at relieving NBCUniversal, merging the two cable companies would result in a large debt burden, assuming Comcast would shoulder much of the post-split debt burden (a feature of the Versant spinoff was that the new company would have less debt), the people said.

There are also strategic questions about the Charter-Comcast deal. When Comcast tried to buy Time Warner Cable in 2014, one of the driving forces behind the deal was the ability to gain leverage over media programmers in TV programming disputes by adding subscribers. More than a decade later, the cable TV business has become a much smaller component of both Charter and Comcast, reducing the value of this potential synergy.

Moffett said there are few broadband synergies from simply having more customers. The cable business is a community-based business and will be largely unaffected by expansion, he said.

“If you own a system in North Carolina, your cost structure in Chicago is not significantly impacted,” Moffett says.

Michael Angelakis, a former Comcast chief financial officer and incoming CEO of the spun-off cable assets, said Monday that he believes the company has the network assets it needs to compete.

Comcast may be looking years ahead rather than an immediate deal.

“Maybe it’s not imminent, but I think the stage is probably set for M&A,” said Jonathan Miller, a media industry veteran now chief executive of Integrated Media, which specializes in digital media investments.

“This is literally being done to give people more choice in terms of different opportunities,” Miller said.

The timing of future contracts may also be subject to technical issues. Comcast estimated the timeline for completion of the separation to be one year. Standard U.S. tax regulations then require a potential acquirer to wait even longer to acquire a recently separated target. But there are varying degrees of how long companies will have to wait, depending on details such as the type and timing of the deal, the person said.

Disclosure: Versant Media Group is the parent company of CNBC.