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Comcast Corporation: Set For Value Recreation With Landmark NBC Deal

 February 13, 2013 03:33 PM

(By Mani) Comcast Corporation (NASDAQ: CMCSA) is set for value recreation via its NBCUniversal purchase from General Electric Co. (NYSE: GE) as the deal should boost 2013 earnings apart from providing competitive advantages.

By shelling $16.7 billion, Comcast would gain full ownership of the NBC broadcast network, cable channels MSNBC and Bravo, and the Universal film and theme park businesses.

Comcast has been trying to buy the remaining 49 percent stake from GE since it bought the initial 51 percent stake in January 2011, but ownership of NBCU remained split at 51:49 until the Feb. 12, 2013 when Comcast agreed to take full control of NBCU, which which operates 30 news and entertainment cable networks.

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Comcast's ownership of NBCUniversal (NBCU), which owns the iconic CNBC news channel, provides it with a revenue mix and potential operating leverage, as well as certain strategic advantages in the shift to a TV Everywhere model, which will allow it to continue to outperform its peer group in the foreseeable future.

The deal which is accretive immediately, values NBCU at $39 billion, an attractive valuation versus NBCU's peer group such as Walt Disney Co. (NYSE:DIS) and Time Warner, Inc. (NYSE:TWX). In addition, the future value of the assets under the 2014-to-2017 redemption structure, is expected to close in 1H13, and should offer Comcast certain tax efficiencies which also aid EPS accretion.

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"We believe consolidation of NBCU creates shareholder value. Our initial analysis shows that the deal should offer upwards to $0.20 in potential accretion in 2013, implying 2013 EPS of approximately $2.35, versus our prior estimate of $2.15," analyst Todd Mitchell of Brean Capital wrote in a note to clients.

For the fourth quarter of 2012, NBCU revenues grew 4.8 percent to $6 billion while EBITDA grew 10.9 percent to $1.17 billion. The company showed strength in Film offset by somewhat lower Cablenets and Theme Parks.

NBCU's broadcast revenues edged up 7.9 percent to $2.0 billion, driven by strong prime-time ratings at the NBC broadcast network, as well as higher political advertising at the owned local stations.

NBCU captured the second spot in prime time only next to CBS Corp.'s (NYSE: CBS) network in both total viewers and the 18-to-49 age group for the September ratings season, according to Nielsen data. In the same period last year, NBC was third in the younger age group and last in total audience.

In the filmed entertainment business, NBC's Universal Pictures delivered notable hits in the fourth quarter such as Les Miserables, Pitch Perfect, and This is 40.

Still, Comcast has to work around NBC's movie and broadcast unit, which lacks some depth as the NBC relies a lot on football. Comcast should try to add more shows such as "The Voice" to improve ratings further.

Despite its 20 percent hike in dividend and $2 billion buyback, Comcast may need to tighten its capital returns in 2013 as content costs in cable may grow above expectations with ESPN and FOX negotiations hitting this year.

Further, Comcast is issuing $6 billion in debt, and it sees 15 percent increase in 2013 capital expenditures due to a 10 percent increase in Cable capital expenditures for TV Everywhere and a 25 percent rise in NBCU capital expenditures to fund new attractions at its theme parks.

However, the above negatives would be more than offset by the immediate EPS accretion of the deal as well as certain strategic advantages NBCU provides Comcast over its pure-MSO peers. With this deal, Comcast now owns the content as well as the distribution, giving an edge over its rivals and giving more value for its video, broadband, and voice customers.

The company's net additions in combined video, high-speed internet and voice customers increased by 503,000 in the fourth quarter of 2012, an 8 percent increase from last year. As of Dec. 31, 2012, the company had 51.3 million customers, a net increase of 1.5 million or 3 percent over the prior year.

Moreover, the deal pushes the leverage to 2.3x versus the 1.5x at year end and the company's 2.0-2.5x long term target.

"Based on the estimated $8.1B in FCF the company will generate in 2013, growing to $8.8B in 2014 and the company's access to 100% of the cash flow, we estimate leverage will fall to 2.1x by the end of this year. This puts the company in a position to meaningfully increase cash returns in 2014," UBS analyst John Hodulik said in a client note.



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