Wall Street to Comcast: Are You Serious?

As Yogi Berra once said, it's déjà vu all over again. Comcast (CMCSA) is rumored to be interested in buying NBC Universal from General Electric (GE). And just like back in 2004, when Comcast bid $54 billion for the Walt Disney Co. (DIS), investors are horrified. The Sept. 30 reports sent the cable giant's stock price plunging the next trading day, down more than 6% as of 2:30 p.m. ET, even after the Philadelphia company hustled out denials as fast as its spokeswomen could e-mail reporters.

Why does Wall Street give so little love to Comcast CEO Brian Roberts whenever he's seen to be straying outside his mainstay business of wiring homes with cable and delivering crisp pictures and Internet service? For starters, it's hard to find a more notoriously fickle business than entertainment, where TV ratings and hit movies often disappear overnight. Just ask Comcast executives, who five years back paid an estimated $300 million for a 20% stake in movie studio MGM. The cable company has since written down that investment as the debt-laden MGM struggles to avoid bankruptcy. Or ask GE, which has spent a decade in the ratings desert with NBC.

So how might this deal be different? Savvy folks like Roberts and lieutenant Steve Burke, a onetime ABC executive, see value in NBC. Comcast already owns cable channels E!, Style, and others, and plainly is aching to add NBC's brace of cable channels, which include Bravo, the USA network, MSNBC, and SyFy. In fact, cable channels are the hottest properties in the fragmented media world. By collecting fees from cable and satellite operators in addition to selling advertising, cable channels are a hedge against the fast-changing (and not for the better) advertising market.

(According to a report on CNBC, Comcast officials are now talking about merging their content assets with those of NBC Universal to create a new company. Comcast would have 51% control and would put in $7 billion, but wouldn't endanger its credit rating or issue any stock.)

Cable Operators Aren't Growing But you get the idea that Comcast is mostly worried about the rapidly shifting media landscape and where that will leave the company. Increasing numbers of folks are getting video from online sites and some (though not yet a lot) are killing their cable or satellite service to log onto TV shows via the Internet instead.

Satellite continues to add subscriptions, as do telephone operators such as AT&T (T) and Verizon (VZ) that offer TV service. Cable operators, meanwhile, largely haven't been growing. In the last six months, for instance, Comcast lost about 1% of its 24 million subscribers to "increased competition," it said in its most recent financial filing. It's done a great job so far of making up for the loss by selling its customers on higher-priced digital service and phones, but clearly it can't do so forever.

"Owning a major content stake would give Comcast a tremendous amount of control over the future evolution of distribution venues," says Bernstein Research analyst Craig Moffett. He figures Comcast could help control the destiny of Hulu, the online content site started by NBC and Fox (NWS) and whose online TV shows are seen by cable operators as a looming threat. Moffett also postulates that Comcast would be able to control the timing of when NBC shows or Universal movies show up on its video-on-demand services, perhaps making them earlier than current offerings to enhance their popularity. And that may be true: Even as its investment in MGM tanked, Comcast gained access at cut-rate prices to the studio's large library of older films.

Settling for a Only a Piece? The payouts from those synergies—a frightening word when it comes to media M&A—are mostly theoretical, though. Most analysts believe the staggering price tag for all of NBC Universal—possibly $35 billion—likely would force Comcast to take a smaller piece. For one thing, federal regulators might not allow Comcast to own NBC TV stations in the same markets in which it owns cable systems.

A truncated acquisition might be just as well for Roberts. He would seem to get his prize, while possibly dodging the storm of criticism that an outright deal would almost certainly set off.

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