What is the Word on the Street after Comcast hinted at cable ops spin-off?
After posting a third quarter results beat, media and cable giant Comcast (NASDAQ:CMCSA) hinted at divesting its cable operations on their earnings call with analysts.
The company said it has been struggling, like its peers, due to deteriorating landscape for cable in the U.S. and now is exploring options for its portfolio of networks. Comcast executives shied away from giving any specifics.
Word on the Street
Evercore ISI: “The scope of a potential spin under management’s current thinking is perhaps narrower than some investors would prefer compared to grander hopes of a more definitive separation of its connectivity and media assets. That said, this marks a significant shift for a company that has long touted the synergies between its two segments, and we believe clearly signals that management is open to alternatives for its mature assets facing secular challenges.”
“From our end, we’re encouraged that Comcast is looking to optimize its portfolio. Secular challenges and persistent topline pressures make the synergy opportunities through M&A a strategy necessity. That said, we’ve observed from countless media deals over the years that bigger is not always better when it comes to linear media assets, and that eventually cost cuts dwindle the relevance of networks even further, so SpinCo’s potential dance partners (e.g., WBD and PARA) and strategy will be key.”
Morgan Stanley: “We estimate a Cable Network spin-off would be modestly accretive to Comcast’s overall growth rate, at roughly 100 bps. It is roughly neutral to Comcast’s multiple, as the distributed earnings (roughly $0.40-0.50 per share) are largely offset by the equity distribution ($4/share).”
“Comcast has largely been a buyer of assets for decades. While spinning a $15-20bn business in the context of its $265bn enterprise value would not be transformative, Comcast is still publicly discussing exiting businesses it has owned for ~15 years. Diversification can have its benefits to shareholders, but a willingness to spin or sell assets that are no longer aligned strategically with the company’s larger goals is arguably a larger benefit.”
Scotiabank: “The continuous changes impacting the cable industry have led management to commence a study of whether spinning off a new company comprised of the cable networks would make sense. While the idea is only being entertained and nothing is set in stone, we think this could potentially be a positive development.”
“In addition, if structured properly, the existing company would then be able to show higher growth rates with a strong balance sheet unhindered by the network asset’s negative trend line. Our back of the envelope analysis shows a potential value creation of around $5 per share by separating these businesses.”
Benchmark: “This would isolate a business that dampens Comcast’s overall valuation multiple and position the networks for M&A.”
“We think consideration of a spin-off is manifestly dictated by the networks constituting a significant albatross for actual market valuation, as it appears evident their value and strategic relevance is optimized by remaining within NBCU and Comcast. We view the news operations as especially integral to Comcast’s brand and identity (even if MSNBC can be controversial), although their shelf space importance, for example, Olympic coverage, diminishes with Peacock now showing breakout traction.”
Macquarie: “The big news on the call, however, was the announcement of a strategic review that may lead to a spinoff of NBCU’s cable networks. This would involve some or all of the pay TV networks that include CNBC, MSNBC, E!, Telemundo, USA, and others, which, when last broken out in 2020, generated $10.8bn in revenue and $4.6bn in EBITDA. Comcast would keep NBC broadcast ($10.2bn 2020 revenue and $1.9bn EBITDA) and Peacock (we estimate 2024 revenue of $4.9bn and EBITDA -$1.8bn).”
“Spinning cable networks would remove this declining revenue component that is likely weighing on the trading multiple. NBCU has been deemphasizing cable nets for some time, exiting regional sports and putting content on Peacock; new NBA rights were won thanks to broadcast and Peacock—not cable, as Warner Bros. Discovery found out.”
Seeking Alpha Analyst Deep Value Ideas: “Overall, I’m not really convinced by the hinted separation plan, but I’m not thinking of selling my position at this point.”
“If separation of the cable and media/studios/parks businesses materializes, I would hope that the transaction would be structured as a split-off, similar to the separation of Johnson & Johnson’s consumer health segment, rather than a spin-off. This could result in a significant cash inflow for the parent company, while a small amount of debt could even be separated. Such a transaction would further de-risk the legacy business, and I could therefore see myself maintaining my position in this business and not participating in such a hypothetical split-off, which I would leave to more growth-oriented investors.”
CMCSA shares are essentially flat in late afternoon trading on Friday.