Is A Comcast-Sprint Deal Next?

Comcast (NASDAQ:CMCSA) is the largest U.S. cable operator, providing consumers and businesses with pay-TV, high-speed internet and digital voice (VoIP) services, usually in triple-play packages. The company has around 22.375 million pay-TV subscribers and 22.369 million high-speed internet subscribers as of March 31, 2015. ^[1] Additionally, the company also operates the NBCUniversal, which owns the NBC and Telemundo broadcast networks, cable channels such as USA Network, E!, CNBC, MSNBC, Syfy and Bravo, film studio Universal Studios and theme park business Universal Parks and Resorts.

In this article, we make a case for Comcast acquiring Sprint (NYSE:S) to add wireless services to its business for a quadruple-play bundle. This could help the company compete effectively with the proposed AT&T-DirecTV combination in a market where the boundaries between wireless and cable/online video are blurring. Our price target for Comcast stands at $62, implying a premium of around 10% to the market.

See our complete analysis for Comcast

Comcast’s Performance Update

The high-speed Internet business has performed exceedingly well for Comcast due to rising demand for faster Internet and a corresponding decline in DSL Internet connections. The segment’s subscriber base increased from 13 million subscribers in 2007 to almost 22 million by the end of 2014. ^[2] Comcast is also operating in the stagnant pay-TV industry, which has lost nearly 3 million subscribers in the last two years. ^{[3] [4]} This can be attributed to a combination of factors such as market saturation, fierce competition and the rise of alternative video platforms such as Netflix. However, Comcast has managed to slow the pace of subscriber losses in recent quarters, primarily due to its triple play bundling, which combines pay-TV, high speed internet and voice into one package. This bundling helps reduce subscription fees for subscribers as it saves on infrastructure costs and leads to operational efficiencies and economies of scale.

The Sprint Opportunity

Notwithstanding its recent strong performance in the pay-TV and broadband market, Comcast will be at a disadvantage if the proposed AT&T-DirecTV merger goes through. The combined entity will be able to offer four bundled services (mobile, fixed-line, broadband and TV) compared to three offered by Comcast. Comcast could respond to this competition by reducing its subscription fees, but this seems highly unlikely considering that its average monthly fee per subscriber has not declined in the last eight years.

Another option for the cable major could be entering the wireless industry and upgrading its triple-play offerings to quadruple-play bundles. With T-Mobile and Dish Network considering a merger, Comcast could look into entering a partnership with Sprint, or even buying out the wireless carrier. In terms of market cap, Comcast is over 7.5x more valuable than Sprint. Although the carrier has struggled to attract wireless subscribers in recent years, it is showing signs of improvement – both in terms of overall subscriber gains and country-wide network quality.

In a bid to further improve its network, Sprint recently announced that it has received approval from its majority shareholder SoftBank for its new network modernization plan. ^[5] The plan, which will involve improving the carrier’s coverage and network speed, will likely require billions in capital expenditures as well as potential spectrum purchases. However, this costly plan will put an even greater strain on the company’s financial position. Sprint’s overall revenues declined almost 7% year-over-year in Q4 FY14 as users shifted to discounted service plans. In terms of income, the carrier reported a net loss of $224 million, or 6 cents per share compared to a loss of 4 cents per share in the prior year quarter. It currently has net debt of over $28 billion and has not reported positive free cash flows in the last two years. It reported negative $914 million in free cash flow in the quarter ending March 2015. With SoftBank’s financial backing and the possibility of efficient bundling of different services with Comcast, Sprint may be able to turn around its fortunes earlier than expected.

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1. Comcast’s SEC Fillings [↩]
2. Comcast’s SEC Filings [↩]
3. Major Multi-Channel Video Providers Lost About 105,000 Subscribers in 2013, March 14, 2014, Leichtman Research Group [↩]
4. MAJOR PAY-TV PROVIDERS LOST ABOUT 125,000 SUBSCRIBERS IN 2014, March 03, 2015, Leichtman Research Group [↩]
5. Sprint Secures Plan to Modernize Its Network. But at What Cost?, Re/Code, June 2015 [↩]