Done Deal

Five years after losing a bid for The Walt Disney Co., Comcast chairman and CEO Brian Roberts finally won his content prize, landing a deal to control 51% of NBC Universal and creating an unparalleled content and distribution juggernaut.

The deal, which still has to pass what is expected to be intense regulatory scrutiny, will combine NBCU's cable channels (Bravo, USA Network, Syfy, CNBC, MSNBC, The Weather Channel), the NBC and Telemundo broadcast networks, 26 television stations and the Universal Pictures movie studio with Comcast's own cable channels (E!, Versus, Golf Channel, regional sports networks, Style and others).

In a single stroke, Roberts — who grew up in the cable industry under the watchful eye of his father, Ralph, the former Comcast chairman — has restructured the media landscape, creating a vastly larger, vertically integrated media company that will lead the delivery of content on multiple platforms and that testifies to cable's dominance over the broadcast industry.

Comcast will own 51% of NBCU (which it will house in a separate entity called Comcast Entertainment Group) and General Electric will control the rest. The deal values the NBCU properties at about $30 billion and the Comcast assets at about $7.25 billion.

Current NBCU CEO Jeff Zucker will become CEO of the new venture, reporting to Comcast chief operating officer Steve Burke.

On a conference call with analysts last Thursday, Roberts summed up his feelings on the deal succinctly.

“With this transaction, I believe our company is strategically complete,” Roberts said on the call.

The new joint venture is expected to generate about $18.2 billion in annual revenue, $3 billion in cash flow and $1.4 billion in free cash flow in 2010; the deal is expected to close in nine to 12 months.

Miller Tabak media analyst David Joyce agreed with Robert's assessment of the deal, adding that it is immediately accretive to Comcast. It provides organic growth through increased distribution, retransmission consent opportunities, the creation of more online and VOD content, and ad and affiliate-rate growth. Joyce added that applying NBCU's formula of production, programming and promotion to Comcast's generally lower-performing cable nets should also boost growth.

“All that equals no need to acquire anything else, although the JV could want more cable nets over time,” Joyce said.

Investors, who at first appeared to dislike the deal — Comcast stock fell 7% ($1.24 per share) on Oct. 1 when news of talks with NBCU first broke — changed their minds after the deal was announced. Comcast stock was up as much as $1.12 (7.5%) to $16.06 per share before closing at $15.91 each last Thursday, up 6.5%, or 97 cents per share. Also helping the stock was Comcast's plan to increase its annual dividend by 40% and to continue its stock repurchase plan.

In many ways, the deal is just another in a long line of great deals for Comcast — for about $13.75 billion ($6.5 billion in cash and cable networks worth $7.25 billion) it gets control of the fourth-largest broadcast network, a dozen highly rated cable channels (including perennial primetime ratings winner USA Network), theme parks and TV stations.

GE gets a quick cash infusion and an exit strategy from a business that it no longer considers a core asset. According to the deal, GE can begin selling its stake back to Comcast after three and a half years — at a 20% premium to its market value at the time — and can fully exit after seven years.

Comcast initially began conversations with GE about NBCU in July, but talks heated up in October after Vivendi S.A., the French conglomerate with a 20% interest in NBCU, stated publicly that it may be looking to exit. After some initial posturing, Vivendi agreed in early December to sell its interest to GE for $5.8 billion.

The deal ends what has been a longtime quest for content for Roberts, who first attempted to boost Comcast's programming presence with a failed $66 billion unsolicited bid for Disney in 2004. Although Disney shareholders ultimately rejected that deal (they thought the price was too low), Roberts has secretly lusted after content assets ever since. According to some reports published after the deal was announced, Roberts had earlier entertained buying Viacom and even Facebook before setting his sights on NBCU in July.

Analysts for the most part have been negative on the deal, critical of the concept of vertical integration in general. Many have called past attempts to merge content and distribution as utter failures, citing Time Warner as a prime example. Time Warner spun off its Time Warner Cable unit in March and is on track to do the same with its AOL online division by the end of the year. The company has said publicly that the vertical integration model simply does not work.

But Roberts dismissed the comparisons to Time Warner, adding that the spin off of Time Warner Cable in March is “not relevant to what we are doing here today.”

“We have a cable programming business that was subscale,” Roberts said. “By combining it with NBC Universal, we achieve scale.”

And it acquires a strong growth engine. While cable distribution will still drive the business — even after the deal is closed, cable systems will still generate 80% of Comcast's operating cash flow — the NBCU partnership will drive growth.

Cable revenue and cash flow have been growing in the mid-to-high single-digit percentage range for the past several quarters, and it is largely believed that the business is maturing. While there are still pockets of growth — like commercial services and high speed data — programming has been rising at a healthy clip for the last few quarters.

According to Comcast, its own cable networks have been growing operating cash flow by 10.6% annually since 2004. At NBCU, the growth rate is even better — 16.2% annually since 2004.

On the conference call, Burke said that while Comcast doesn't expect that growth rate to last forever, the company expects it to remain robust.

“Will the growth of these assets be the 15% or 16% that they've been over the last six years in the next five or six? Maybe not,” Burke said. “We're certainly not modeling 16% forever. Trees don't grow to the sky. But will these have very predictable, very stable, very nice growth rates? Our bet is they will.”

And that isn't all. With access to NBCU content, video-on-demand windows could shrink, Comcast's video-on-demand offerings could swell (Universal Pictures has 4,000 titles in its library), and new cable channels could be created. Comcast's own interactive advertising initiatives — through its participation in the Canoe consortium — could also spread across NBCU properties.

“This company's ability to reach target markets like women, or people interested in entertainment or news, is really unparalleled,” Burke said.

But executives were a little sketchier regarding other potential benefits of the deal, such as online programming availability and retransmission consent. NBCU is a one-third owner of Hulu, the online content site, and some analysts have speculated that it could merge with the industry's TV Everywhere concept of offering pay TV subscribers online access to programming.

Burke said on the call with reporters that, so far, NBCU has managed Hulu exactly as the cable company would have — offering mostly broadcast content on Hulu and sparingly offering cable content on their own channels' web sites. That could change after the deal is sealed, however.

“Once the deal is approved, we are going to want NBC Universal to continue to do what needs to be done to maximize its value of its content on the Internet,” Burke said on a conference call with reporters, adding that any decision to make Hulu a premium service is not Comcast's decision to make.

“We are not coming into this with any preconceived notions,” Burke added. “NBCU is a minority partner of Hulu. We hope they will continue to run Hulu successfully because it is an important asset. For the next year, those are their decisions. I actually think TV Everywhere and Hulu are very complimentary. I would anticipate for the foreseeable future there would be a place for both.”

Roberts was somewhat vague regarding retransmission-consent plans. Through the deal, the joint venture will own 26 TV stations — 10 NBC owned-and-operated stations and 16 Telemundo O&O's — all of which have the opportunity to seek cash for retrans consent. Even NBC has reportedly been asking for retrans money for the network.

“The broadcast business has been talking about retransmission consent fees for a while, value has been getting conveyed for a while,” Roberts said. “Historically, that has been creating cable channels for a number of the broadcast companies, [and] NBC is very much included in that. It continues to evolve and will be part of the business as it goes forward and probably a more meaningful part of the business.

“I think we have an opportunity by being in both businesses to help find constructive solutions to allow the broadcast business to thrive and to grow and to continue to invest in the highest class of programming that it does,” he added. “And we are still a cable operator that is trying to manage its costs. I think the two are going to work well together.”

But that is an issue for next year, when Comcast is expected to receive regulatory approval for the deal. Until then, Roberts can bask in the satisfaction of finally landing the deal he always wanted.