Could Comcast-NBC End Up Like Time Warner?

January 18th, 2011 by Trefis Team

Comcast (NASDAQ:CMCSA) competes with satellite pay-TV providers like Dish Network (NASDAQ:DISH) and DirecTV (NASDAQ:DTV), cable companies like Time Warner Cable (NYSE:TWC), and telecom operators like AT&T (NYSE:T) and Verizon (NYSE:VZ). Our price estimate for Comcast’s stock stands at $25.24 which is about 12% above the current market price.

The company is nearing completion of its deal to merge with NBC Universal. We wrote an article recently discussing Comcast’s deal and what it may gain from a tie up with NBC (see article Comcast-NBC Deal, What is Comcast’s End Game?). However one item we did not cover is how investors in Comcast might respond to the idea of owning a broadcaster like NBC. For a glimpse of how this might play out we can look at the Time Warner (NYSE:TWX) and Time Warner Cable.

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Cable vs. Broadcast Companies

One of corporate finance issues that led to the TWC spin off from its 84% parent-owner Time Warner was that the business model and cash flow profile of these two companies are very different. Cable companies like Time Warner Cable generate lots of free cash flow, which was being sent to the coffers of parent Time Warner. [1] If this capital was invested in other activities that benefited the parent and not TWC then effectively Time Warner’s shareholders were being subsidized by the cash flows that should have gone to Time Warner Cable shareholders. This sort of structure can lead to a lower valuation for the cable business, and consequently the media company and cable companies split in order to better focus on their core businesses and to the benefit of both shareholder bases.

This raises doubts in context of current deal between Comcast and NBC. Comcast is a cable company that is more highly levered and has a substantially different cash flow profile than NBC. One issue is how will management balance its focus between these two businesses and how they interact, and would they be better off if run as two separate companies? Also will Comcast shareholders benefit from this huge investment in NBC, and if so over what time frame?

Let us know what you think by commenting on the box below.

You can see the complete $25.24 Trefis price estimate for Comcast’s stock here.

Notes:
  1. Time Warner To Spin Off Cable, The Washington Post, May 1 2008 [↩]