Here to discuss the impact for Comcast shareholders, as well as the potential impact on the broader media landscape, is associate director Mike Hodel. Mike, thanks for joining me.
The $30 billion value that they assigned to the assets that GE is contributing looks a bit rich to us. It's about 10 times operating income ex depreciation and amortization, which is high for the industry. It's about two times higher than a Disney or a Viacom.
Right now we think, Disney, Viacom, those types of companies, are pretty fairly valued in the marketplace, and we don't think they offer a significant margin of safety. Especially important right now, given the way that media consumption is changing, consumer habits are changing, with respect to how people consume and purchase content.
So there's a lot of uncertainty with respect to what these businesses are going to look like over the long term. So we think it's important to have a margin of safety, relative to any estimate of fair value.
Comcast, on the other hand, is paying a bit of a premium, relative to what we think these types of assets are typically worth, which again, given Comcast's reputation as being a smart acquirer over the years, we think is surprising. And we're a little bit disappointed that Comcast is paying a premium for these assets.
Glaser: So does it impact your opinion of Comcast stock right now?
Hodel: I think it's important for Comcast shareholders to remember that the company is still dominated by the cable distribution business, the traditional cable plant, Internet access, phone service, those types of things, where we think they do have a strong competitive position. We're not going to radically alter our opinion of Comcast, but we do think that this deal moves the needle in a negative way.
It puts the company in a business where their competitive position won't be as strong, and again, we think it destroys some values for shareholders at the outset, because of the premium that Comcast is paying for the assets. But again, it's important to remember that the lion's share of the company will still remain in the traditional cable business.
Glaser: Initially, Comcast is taking only a 51% stake in NBC/Universal. Do you see them increasing that over time?
Hodel: Well, it's not going at Comcast's discretion. It's going to be at GE's option to put their remaining stake in NBC/Universal, back to the venture, back to Comcast essentially. That's one of the more complicated facets of the deal, and one of the things that we don't like about it, is that it could force Comcast to put additional money into NBC/Universal at a time when NBC/Universal is struggling.
If NBC/Universal can't raise the debt that it needs to fund the buyout of GE over time, without losing its investment grade credit rating, or if debt gets beyond a certain threshold, Comcast would be forced to throw more money into the deal. And again, that would only be likely to happen if NBC/Universal was struggling, so that could be a double whammy for Comcast down the road.
They've put all of their programming resources, and a big chunk of cash, into NBC/Universal, NBC/Universal struggles, and on top of that they have to throw more money at the venture. So we see that as a potential downside, down the road.
Glaser: So Comcast seems to be trying to appease potentially angry shareholders by raising the dividend and committing to a share buyback program. Do you think that's going to be enough to keep shareholders from trying to block this deal in some way?
Hodel: Well, shareholders can't block the deal because of the Roberts family having significant voting control, so it's unlikely that shareholders would be able to block this deal outright. But I do think that the dividend increase, the commitment to the share buyback, is an attempt to pacify the shareholder base.
There's a number of people who have invested in Comcast over the years that are attracted to the great cash flow that the core business throws off. And a lot of those shareholders would love to see more of that cash flow returned to the shareholder base.
The key thing here is the matter of opportunity cost. Comcast could have taken the $6.5 billion that they're going to pay GE up front and used that to buy back stock. And we think that would have been a great use of capital, given that we think the stock was trading at a very large discount to what the shares are actually worth.
Glaser: Another potential hurdle is regulation, or the regulators allowing this to go through. The Obama administration seems to be somewhat hesitant to allow some of the big mergers through, LiveNation-Ticketmaster comes to mind as a deal that's been kind of floating out there for a long time in the entertainment industry. Do you think that the FCC is going to have a big problem with this deal?
Hodel: There are already a number of precedents in the media industry, distributors like Comcast, or the satellite guys like DirecTV, tying up with content creators like NBCU. And there are well-defined rules about how those entities have to treat other people in the industry once they've merged.
So we think that within that framework, using the rules that are well established in the regulatory realm, applying those to the Comcast-NBC deal, will allow the deal to get done. It is a new administration.
There's potential that the deal, the conditions that are placed on this merger may be more onerous than they've been in the past. You have to wait and see how that plays out. But there is again a large precedent, a large number of precedents, already in the media industry that dictate how content distributors that merge with content creators have to treat others in the industry, have to treat consumers.
Glaser: What impact do you think this deal will have on the broader media landscape?
Hodel: Again, there's going to be a well-defined set of regulations around how Comcast is going to treat others in the media industry, how they're going to treat consumers. So I think that will restrict at least initially how big of an impact this deal will have on the media industry.
Over time, though, it's pretty clear that Comcast wants to shape how content gets distributed to customers, how content is protected from things like piracy, online. I think that's where you'll see the biggest impact over time, is Comcast using its combination of distribution and content to shape how the media industry, as a whole, thinks about how media content is protected and distributed.
Glaser: Mike, thanks so much for talking with me today.
Hodel: Thank you.
Glaser: For Morningstar.com, I'm Jeremy Glaser.
