After mulling the possible implications of a Comcast investment in NBC Universal, Wells Fargo Securities analyst Marci Ryvicker has decided it is a positive for Comcast, so she’s upgraded the cable giant’s stock to “Outperform” (buy) from “Market Perform” (hold).
Ryvicker told client she views the news of a potential transaction as a positive for two reasons: It would provide Comcast with another leg of growth in a high margin business; and the likely structure would not require Comcast to issue any additional equity, nor should its investment grade debt rating be impacted. “Even without a deal, we view CMCSA as fundamentally undervalued and believe yesterday’s [10/1] drop provides a good entry point,” the analyst said. She raised her valuation range for Comcast’s stock to $19-21 from $15-18.
“A potential NBCU deal makes strategic sense,” Ryvicker insisted. There was significant speculation in the media yesterday regarding a potential acquisition by CMCSA of NBCU. The deal structure that makes the most sense to us (reported by CNBC anchor David Farber) entails the spin-off of NBCU into a private company with Comcast taking a 51% ownership while merging its own programming assets (worth $6-7B). Should this transaction occur, CMCSA would have a controlling stake in good-performing cable networks and could also utilize NBCU’s content library. Clearly there is less of a need for the broadcast network/O&Os or theme parks, which could be further spun or eventually sold,” she wrote.
Of course, being a Wall Street analyst, she ran the numbers. “We believe CMCSA should remain investment grade and still have plenty of free cash (over $4B) with which to provide a higher dividend and/or repo additional shares. Our quick math – we assume that NBCU is worth $35B (the high end of analyst ests.), including $12B of debt that would be assumed by CMCSA. This leaves $23B of equity, with CMCSA’s 51% stake valued at roughly $12B. Comcast would ‘pay’ for this stake with ~$5B of cash (via new debt) and $6-7B worth of programming assets. Big picture – CMCSA assumes $17B of additional debt and $3.5B of additional EBITDA, resulting in a leverage ratio of 2.8x (vs. our prior 2.3x est.) at y/e 2010,” Ryvicker calculated.
RBR-TVBR observation: If the focus is strictly on the cable networks, then the broadcasting assets – the NBC Network and O&O stations – could be in play. That would be very interesting for broadcasters.