Less than two hours after The Walt Disney Co. CEO Bob Chapek said he’d like to exercise his right to buy out Comcast’s 33% stake in SVOD pioneer Hulu sooner rather than later, Comcast chief Brian Roberts said he’d buy the streamer outright if it were available.

Comcast’s NBCUniversal was one of the original investors in Hulu, and retained a 33% interest in the company after Disney upped its stake to 67% with its buyout of 21st Century Fox assets in 2019. According to their agreement, Disney has the right to purchase Comcast’s interest beginning in 2024, and Comcast has the right to "put" its stake to Disney on the same date. 

“Hulu is a phenomenal business,” Roberts said at the Goldman Sachs Communacopia + Technology conference on Wednesday. “It has 50 million customers, its scale is fantastic and it has wonderful content. I believe if it were put up for sale, Comcast would be interested and so would a lot of other tech and media companies. You would have a robust auction. There has never been a pure-play, fabulously scaled streaming service put on the market. I don’t know that the public markets are the way to judge the value.”

Asked if he was just making a point or if he were actually interested in buying Hulu, Roberts was a bit vague. 

“That question is up to Disney,” Roberts said. “Either way, the value of 100% of Hulu is what we’re entitled to. But if it were for sale we certainly, and I think others, would also want to get into that opportunity. I think our position is very enviable.”

Roberts' comments seem a bit of a departure from his past stance on the stake, and came less than two hours after Chapek, who spoke at the same conference at 6 p.m. ET, said that he would “love to” buy out Comcast’s stake before 2024 if the cable company agreed on a reasonable price. 

Roberts also chafed at Chapek’s comments in an interview with The Financial Times earlier this week, saying he took “great exception” to the Disney chief's allusion in the article that Hulu’s value has declined as sentiment around streaming companies has waned. 

So perhaps Roberts’ comments were merely his way of informing Disney that  Comcast expects to get paid very handsomely for its stake.

In 2019, Comcast agreed to sell its stake to Disney in 2024, in a deal that set the floor for Hulu’s value at $27.5 billion. Comcast also agreed to sell content from its NBC and Universal Studios arms to the service through 2024. In return, Disney received full operational control of the streamer. 

That deal was struck before either company launched its own streaming service — Disney Plus debuted in November 2019 and Comcast‘s Peacock was unveiled in April 2020 — and the valuations for the service are likely higher. About a year ago, MoffettNathanson estimated that Hulu could be worth as much as $47 billion, but cautioned that streaming valuations were volatile.

At a $27.5 billion valuation, Comcast's 33% interest would be worth about $9 billion. At $47 billion, that stake's value rises to $15 billion.

Disney has said it would like to fold Hulu into its Disney Plus service, but that would require full ownership. While Chapek told the FT that  Disney and Comcast have spoken “numerous” times over the past year about a possible deal, it appears they may have to wait a little longer to iron out an agreement. Whether that’s in two weeks or two years, the ball seems to be in Disney’s court. ■ 

Barclays Group media analyst Kannan Venkateshwar downgraded his ratings on Comcast and Charter Monday in the wake of disappointing Q2 broadband performance, adding that the rapid growth of fixed wireless service from telcos may end up being more of a threat than cable operators think.

Barclays lowered the rating on Comcast to “Equal Weight” from “Overweight” and on Charter to “Underweight” from “Equal Weight,” citing their poor Q2 performance. In addition to non-existent broadband growth in Q2, video subscriber losses at both companies rose significantly during the period -- to 521,000 and 266,000 respectively -- reigniting fears of accelerated cord-cutting for traditional cable. While mobile subscriber growth for both Comcast and Charter exceeded analysts’ consensus estimates for the period, Venkateshwar split from his peers, doubting that wireless will be able to take up the slack. 

Broadband Forecasts Lowered Again

Venkateshwar noted that he now expects Comcast to add about 300,000 broadband customers this year, down from 1.4 million in 2021, and Charter to add about 200,000, down from 1.2 million additions in 2021. He said the debate has shifted to whether or not cable broadband subscribers will actually decline in 2023 and beyond.

The broadband slowdown has weighed on cable stocks for months. So far this year, Comcast stock is down 24%, Charter down 34%, Altice USA fell 35% and Cable One is down 22%. The sector probably will fall even further after Altice USA reports Q2 results on August 3. 

Most analysts have reduced their forecasts for cable broadband subscriber growth again in light of the Q2 results, with Wells Fargo Securities media analyst Steven Cahall cutting his estimates for Comcast and Charter nearly in half. 

Prior to the Q2 results, Cahall had estimated Comcast would add 688,000 broadband customers in 2022 and another 630,000 in 2023. Now, his estimates call for 298,000 residential additions in 2022 and 300,000 in 2023. For Charter, Cahall had estimated residential broadband growth of 499,000 in 2022 and 549,000 additions in 2023. Those predictions have been revised to 152,000 customer additions in 2022 and 295,000 in 2023. 

Fixed Wireless Threat 

The analysts pointed to the potential threat of fixed wireless -- T-Mobile USA added 560,000 fixed wireless subscribers in Q2, far exceeding consensus expectations -- and Comcast’s and Charter’s seeming indifference to that competition. In conference calls with analysts to discuss Q2 results, both Comcast chairman and CEO Brian Roberts and Charter chairman and CEO Tom Rutledge said they believe fixed wireless isn’t much of a threat. 

Roberts called the fixed wireless access Q2 performance a fluke, as excess capacity created a “temporary opportunity targeted at value-oriented customers.” And while he said FWA isn’t having any “discernible impact” on churn, he did acknowledge it was a factor in Comcast’s flat Q2 performance. Not exactly an admission of a threat, but close, even though he added that performance and capacity restraints will likely limit FWA’s overall penetration.

On the call, Rutledge appeared to dismiss the long-term impact of fixed wireless while admitting that it is “an issue affecting growth at the moment.”  

Rutledge said fixed wireless access’s impact is small when compared to Charter’s overall footprint. He said activity levels were the major driver for subscriber losses. And he said that there are other economic factors at play, including low housing occupancy and new construction because of supply chain issues.

“And so we're pretty optimistic, relatively speaking, that as the post-pandemic market activity levels return and normalize, that our share of broadband growth will rise,” Rutledge said on the call. 

Also: Analyst Says Telcos Better Positioned to Chip Away at Cable’s Broadband Lead  

But Venkateshwar warned that fixed wireless could become a factor very quickly, adding that if T-Mobile meets its guidance of 500,000-plus additions each quarter, it will be larger than Altice USA (the fourth largest cable operator in the country) by the end of next year.

Also: Broadband Slowdown Hasn’t Hit Bottom Yet, Analyst Says 

“It is tough to see this not impacting cable structurally when cable [broadband] net adds overall have been [about] 3 million in normal years and T-Mobile and Verizon alone could add 2 million to 2.5 million FWA subs a year,” Venkateshwar wrote. “This is even before the existing DSL base converts to fiber driven by government funding and AT&T’s fiber expansion, which we estimate will result in an additional 20% of cable footprint having fiber overlap.” 

Blame Game

Cable operators have mainly blamed the broadband growth slowdown on lower household moves, an excuse that the Barclays analyst is not buying.

“[T]his is a market share argument and it is not clear why this would drag growth down for the industry as a whole,” Venkateshwar said of slower housing moves. “While cable has gained share vs DSL over time and therefore lower moves would impact growth rates, it is mathematically impossible to get to negative growth as seen last quarter, purely on account of lower move activity. In addition, the decline in move activity is not new and has been going on for years and tends to worsen during recessions. Even if move activity recovers, there are new elements that are likely to reduce cable’s share of gross adds given fiber and FWA entrants.”

Going Mobile 

Other analysts have seemed to side, partly, with cable operators' view on fixed wireless access. In a research note Friday, MoffettNathanson senior analyst Craig Moffett said that while investors will likely focus on broadband performance for a while going forward, they will eventually come around to the thesis that wireless is the new growth engine for cable. According to Moffett, if video was Act I for cable operators and broadband was Act II, wireless is poised to be the industry’s third Act..

Charter added 340,000 wireless customers in Q2, ending the period with 4.3 million customers. Mobile now accounts for 5.5% of Charter’s total revenue. Though the segment isn’t profitable yet, once Charter’s CBRS offload initiatives are completed in the next few years, it will be more profitable than most could imagine, according to Moffett.

The same holds true for Comcast. The largest cable operator in the country added 317,000 wireless customers in Q2, ending with 4.6 million customers. Wireless makes up about 4.9% of Comcast’s total cable revenue and is growing at a 30% annual rate.

“[W]e believe wireless growth remains underappreciated,” Moffett wrote. 

Wells Fargo Securities' Cahall said the jury was still out on mobile valuations, and while unit economics are positive, they don’t yet exceed the cost of service. On the other hand, increased capital spending on wireless could make operators less  reliant on MVNO partnerships and more competitive with telcos. 

“Add it all up, and it's a very logical strategy, but we think the value is too uncertain at flattish adjusted EBITDA margins to offset the [broadband and capex] challenges,” Cahall wrote.

Venkateshwar also was impressed by cable’s wireless performance, but he added that any war between cable wireless and telco FWA will be won by the telcos. 

“Telecom operators have their own issues but their narrative around new revenue sources like FWA is more feasible, at least over the short term, because it is backed by significant capital investments in a fixed cost infrastructure that should provide operating leverage over time,” Venkateshwar wrote. “Cable companies on the other hand have no plans to invest in a full infrastructure based offering, but still believe they can do better with an MVNO model than operators elsewhere in the world have managed. This strategy makes sense to test out the market and launch a service, but to anchor [a] long term strategic pivot of the scale that cable companies are attempting on someone else’s network is not viable in our view.” ■

Influential media analyst Craig Moffett took a deep dive into Altice USA Wednesday, issuing a 39-page report that says with broadband growth behind its peers and doubts that its rural markets can take up the slack, one way to unlock its value would be to take the company private. 

Altice USA stock has been battered over the past few months, dropping more than 20% since July 28 when it released Q2 results that showed zero broadband subscriber growth at a time when its larger peers are watching their high-speed data rolls rise. In his report, Moffett, principal and senior analyst at MoffettNathanson, noted that despite that sluggish performance, Altice USA’s sum-of-the-parts valuation indicates that Wall Street perhaps has the cable company all wrong. 

While Moffett admitted that Altice USA has a “broadband pricing problem,” that there is some doubt that efforts to boost broadband customers in its more rural Suddenlink footprint will offset subscriber declines in its more metropolitan Optimum footprint, even conservative valuations of its four major geographies indicate a much higher value for the company than Wall Street has assigned. 

“There’s a price for everything … and, to put it bluntly, this ain’t it,” Moffett wrote. “Altice’s current valuation is simply too cheap, and by a huge margin.”

The notion of going private at latest appeared to be attractive to some investors. Altice USA shares were up nearly 4% ($1.05 each) in early trading Sept. 8 to $28.19 per share. The stock was priced at $27.94 at 12:57 p.m. Wednesday, up 3% or 81 cents each.

Given the high valuations for recent private cable deals, including Altice’s own  purchase of Service Electric Cable of NJ  (10 times consensus cash flow) and its March  agreement to buy North Carolina broadband provider Morris Broadband (24 times), Moffett assigned an 11.7 times multiple to Suddenlink, a 10.1x  multiple to legacy Optimum systems and a 14.6 times multiple to its Lightpath division, pushing the combined company’s estimated trading multiple to 10.8 times forward looking cash flow. At that multiple, Moffett estimated that Altice USA stock should be priced at $51 per share, nearly double its Sept. 7 close of $27.25 each. 

Moffett added that to take Altice USA private, the company would have to pay a premium to its current stock price, but at $30, $35, $40 or even $45 per share, that option would appear to be a bargain.

Going private is nothing new for cable operators, and usually is driven by the perception that the public market is severely undervaluing assets. Mediacom Communications was the last major publicly traded cable operator to go private in 2011, and has had tremendous success as a private company. In 2004, Cox Communications went private in a deal valued at $8.5 billion, and hasn’t looked back since. 

The analyst added that in one scenario, Altice USA could sell off its Suddenlink division at an 11.7 times multiple (implying a selling price of $22.7 billion) and Lightpath for 14.6 times cash flow (implying a $1.57 billion sale price), while retaining the Optimum business by purchasing the remaining public float. Moffett estimated that at a $35 per share take out price and the sale of Suddenlink and Lightpath, Altice USA could take itself private — debt free — for about $7.9 billion. At $45 per share, the total cost would rise to $10.3 billion.

Moffett stressed that going private is not something he is suggesting that Altice USA will do, but is something they could do. And there are also several possible iterations of the going private option, he wrote.

“The takeaway here is that, even with a meaningful premium, the current valuation is so  cheap that it creates enormous optionality,” Moffett wrote, adding that Altice USA has been doing its own “modified take-private” for years.

Moffett noted that since separating from Altice N.V. in 2018, Altice USA has made about $7.7 billion in share repurchases, reducing its total shares outstanding by about 38%. Excluding the ownership stake held by Altice N.V. chairman Patrick Drahi, and Altice USA has reduced  its public float by more than half.   

“Indeed, it may be the case that Drahi would conclude that it is more attractive to simply stay the course and retire shares until the remaining float is so small that almost any premium paid to complete the job would be financially immaterial,” Moffett wrote. He estimated that Altice USA, if it maintains its leverage target of 4.5 times to 5 times cash flow, would buy back about $8.5 billion of its stock through 2025.

“Altice could go private, sell select assets — we highlighted Suddenlink just because we suspect it would be so easy to sell — and own what's left for... well, for nothing at all,” Moffett continued. 

Two weeks after telling a Wall Street audience that rising valuations could help it pay down debt, WideOpenWest reached agreements to sell systems in five markets with a combined 324,000 broadband customers to Astound Broadband and Atlantic Broadband for $1.786 billion, a deal some analysts believe highlights the sometimes glaring gap between private and public market valuations for cable companies. 

WOW agreed on June 30 to sell systems in Chicago; Anne Arundel, Maryland; and Evansville, Indiana; to Astound Broadband for $661 million. At the same time, Atlantic Broadband agreed to buy the overbuilder’s systems in Cleveland and Columbus, Ohio for $1.125 billion.

WOW said it would use the proceeds to reduce leverage from its current 5 times forward-looking cash flow to 2.5 times, and fund ongoing expansion of its network through edge-out programs and greenfield construction. The deal is expected to close before the end of the year.

The deal comes after WOW chief financial officer John Rego said at the Credit Suisse Virtual Communication conference on June 15 that the company, if it wanted to pay down debt more quickly, could do so by “selling a market or two.”

The deal multiple works out to about 11 times cash flow, in line with recent private cable transactions that averaged between 12 and 15 times EBITDA. 

B. Riley Financial media analyst Daniel Day, who raised his 12-month price target on the stock to $30 per share after the deal, wrote in a research note that WOW was trading at about 8 times cash flow before the sale, further highlighting the disparity between public and private valuations. 

He wrote that the gap is even steeper on a broadband subscriber basis, where WOW’s $4,578 enterprise value per broadband customer is 60% less than its peer group.

“In our view, a 30% to 40% ‘overbuilder discount’ is more appropriate,” Day wrote, adding at that level, WOW’s share price would be $35.

The sale helped push WOW stock up more than 17% ($3.09 each) to $21.34 on June 30. The shares were trading at $21.61 each in afternoon trading on July 2. 

For Astound, which agreed in November to be purchased by Stonepeak Infrastructure Partners for $8.1 billion, the deal will significantly boost its presence in two of its top markets.

According to the deal, Astound will receive about 128,000 residential and business customers from WOW. The addition of the WOW systems will double Astound’s Chicago homes-passed to about 800,000 residences, while increasing its Washington, D.C. footprint (Anne Arundel is near Baltimore) by about one-third.

In Chicago, Astound competes against Comcast and AT&T, and in Washington, D.C., it goes up against Comcast and Verizon’s Fios. Astound CEO Jim Holanda said the added bulk will give it more of an advantage in what has already been a healthy competition. 

Big Boost in Chicago, D.C.

“I like to think we have been a strong competitor in both of those markets, certainly in the 11 years we’ve been operating RCN, and I would expect to continue to be a strong competitor against them in these two markets as we go forward,” Holanda said. Atlantic Broadband will receive about 196,000 internet, 61,000 video and 35,00 telephone customers in Cleveland and Columbus as part of the deal. In a press release, Cogeco Communications president and CEO Philippe Jetté said the deal will add “significant scale” to its U.S. business, raising its total internet customers by about 38%. In addition, the purchase will mean Montreal-based Cogeco will generate more than half of its revenue in the U.S.

Atlantic Broadband has traditionally stuck close to East Coast markets  so the WOW deal represents “a major step” in its strategy, ABB president Frank van der Post said in a press release. 

“The Ohio broadband systems’ geographic fit with our Pennsylvania operations, combined with our success in winning customer share in competitive markets and our experience integrating acquired properties, will ensure operational efficiencies, a seamless transition for customers, and strong growth in these markets,” van der Post said. 

B Riley media analyst Daniel Day raised his 12-month price target on WideOpenWest to $30 per share from $28, adding in a note to clients that the overbuilder’s decision to sell off some assets for about $1.8 billion will lead to more robust cash flow growth and better position it for continued network expansion.

WOW said Wednesday that it would sell systems in five markets -- Cleveland and Columbus Ohio; Anne Arundel, Maryland; Chicago; and Evansville, Indiana -- to Atlantic Broadband and Astound Broadband for $1.786 billion. The deal is expected to close in the second half of the year.

Day, who earlier in the week raised his target on WOW to $28 from $26 per share, said the deal warranted another price increase, based on new projections for cash flow growth. In his July 1 note, Day said that while his earlier price increase took potential asset sales into consideration, the size of the actual deal “was a surprise to us.”

WOW has said it will use the proceeds from the deals to reduce leverage from its current 5 times cash flow to about 2.5 times, as well as fund ongoing edge-out and greenfield expansion to its network.

WOW stock soared on news of the deal, rising as much as 17% ($3.09) to $21.34 per share on June 30, before closing at $20.71 each, up 13.5%. Shares were up about 1% in early trading July 1 to $20.92 each. 

“In our view, yesterday's positive market reaction to the announcement was warranted, and we see continued upside for shares,” Day said in his July 1 note to clients. He based his new price target on the shares on revised 2022 cash flow estimates ($320 million versus his prior estimate of $288 million) and a boost in the assigned enterprise value/EBITDA multiple on the stock to 10.5 times from 10 times. 

Day had pointed out in an earlier note the disparity between private and public valuations of cable, noting that the WOW deal is valued at about 11 times cash flow while the company’s public trading multiple is about 8 times. Other past private cable deals have been valued between 12- and 15- times cash flow, he noted.

WOW is expected to use its nearly $1 billion in Net Operating Loss carry-forwards to offset the tax hit on the sales -- Day estimated that net proceeds to the company would be about $1.4 to $1.5 billion.

Day also was encouraged by the increased penetration rates at the systems it will keep -- WOW estimated that after the deal, overall penetration of services will rise to 29% from 26%. That, according to Day, likely means that WOW is keeping properties where it is more “incumbent-like” instead of an overbuilder, which should also lead to further multiple expansion. 

“By pursuing edge-out and expansion strategies in markets that have higher expected penetration rates, WOW lowers the capex associated with each new inorganic subscriber added,” Day wrote.

As a result, Day is lowering his capex estimates for 2022 to $155 million from $225 million.       

Cable Operators have begun to seriously test the valuation waters, with Altice USA finally issuing preliminary documents for a long-awaited initial public offering and small operator Wave Broadband initiating an auction for a possible sale.

Altice USA, the domestic arm of European telecom company Altice N.V., filed its registration statement with the Securities and Exchange Commission on April 11, ending what had been months of speculation. Altice USA first said it was considering an IPO in October.

The documents left a lot of unanswered questions, as Altice has yet to reveal the number of shares, pricing and what percentage of ownership it will offer to the public. But some financial community sources have said that reports that claim Altice USA is prepared to offer a 20% stake in the company to the public are off the mark. They say the actual percentage is much lower.

DEAL CURRENCY PROSPECTS
That would align with what most analysts believe is the main reason for the IPO: to give some of Altice’s financial backers a path toward realizing their investment.

While an IPO could give Altice USA a deal currency to snap up other small cable operators, the company is currently busy digesting the two large deals it completed in the past 18 months: the $9.1 billion purchase of Suddenlink Communications in December 2015 and the $17.7 billion buy of Cablevision Systems in June.

Publicly held Cablevision was an all-cash purchase Altice needed help to finance. Suddenlink’s private-equity backers — BC Partners and the Canada Pension Plan Investment Board (CPPIPB), which kept a 30% stake in Suddenlink after that deal was completed — bought a 30% equity position in Cablevision for $1 billion.

The IPO would allow those private-equity partners to monetize some of their stake, but not likely all of it.

“Canada Pension is very long-term focused and it may be a little early for BC Partners to be lightening up aggressively,” Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said. “I am assuming Altice itself raises very little new capital.”

Just how much Altice USA could raise and what value the IPO could place on the company will likely be in part determined by private valuations.

Those private assessments have been climbing rapidly.

Altice would be the second small cable operator to test the public markets this year: Overbuilder WideOpenWest filed a preliminary prospectus for an IPO in March that could raise as much as $750 million. WOW, with about 486,400 video subscribers, is about one-tenth of Altice USA’s size of about 4 million video customers.

Cable operators are usually valued on multiples of cash flow, and for the most part those numbers have been high. Valuations for small and large cable operators alike range from about 7.5 times cash flow to more than 11 times. NewWave Communications, which sold to publicly traded Cable One earlier this year for $735 million, was valued at about 11.5 times forward-looking cash flow, while Charter Communications trades at 9.5 times cash flow.

Backing out its NBCUniversal programming arm, Comcast trades at about 7.5 times cash flow, Wlodarczak said.

Cable One is valued the highest of the public operators at about 10 times, but that is mainly because it is considered a takeover candidate (with Altice as one of the possible buyers). Another key indicator could be the ongoing auction for Seattle-based Wave Broadband, which also has come on the block. According to sources in the financial community, Wave’s owners — private-equity players Oak Hill Capital and GI Partners — are seeking as much as $2 billion for the 138,000-subscriber cable company. At that price, Wave would be valued at about 10 times the estimated $200 million in annual cash flow.

For that reason Wlodarczak said he believes Altice USA will have a healthy valuation — 9 times cash flow or more — “if people start to think about upside from possible additional Altice acquisitions.”

Most analysts believe Altice USA will take at least a year to integrate its existing operations before it goes back out on the hunt. The new stock, though, would provide a strong new deal-making option.

“I think they still have some integration work to do,” Telsey Advisory Group media analyst Tom Eagan said. “I imagine they will trade in between Comcast and Charter, especially because of their growth and the increase in margins. I would not be surprised if they did use it [the stock] for acquisitions.”

VARIABLE PUBLIC VALUES
Stock multiples for cable distributors have varied widely in the past few years. According to Eagan, Comcast, the largest cable operator in the country, had a trading multiple of 7.1 times in 2015, rising to 8.3 times in 2016 and is expected to be about 8.5 times in 2017. Charter, which has been much traded at 8.5 times in 2015, rising to 10.2 times in 2016.

The outlier has been Cable One, the midsized Phoenixbased cable operator that was the sector’s best performing stock in 2016, rising more than 43% for the year. Cable One is trading in the 10 times range, despite losing subscribers at a 20% pace. Most analysts see one catalyst for the appreciation in the stock over the near term — the potential that it will be purchased by another cable operator, probably Altice.

Altice USA has given no indication of an intention to buy Cable One, and most analysts don’t think it would be a good move to put the two together. Still, that hasn’t stopped the market from speculating.

“I don’t think the logical candidates — Altice, Charter or Comcast — are interested in buying Cable One,” Wlodarczak said.