Comcast’s Cable Channels Spin Off Gets Mixed Wall Street Reaction

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As someone who’s been following the media industry for the past two decades, I must say this move by Comcast to spin off most of its cable channels into a separate entity is quite intriguing. It’s like watching an old VHS tape being transferred to a sleek digital format – modernizing an outdated system while retaining the classic favorites.

On Wednesday, as Comcast revealed their strategic plan to split off the majority of their cable networks (previously a significant source of income), Brian Roberts and his team indicated a genuine chance for investors to invest further while expanding operations, along with a fresh pathway for growth and expansion – in simpler terms, a promising opportunity for development and increased scale.

Under the leadership of Mark Lazarus, this fresh entity encompasses networks such as USA Network, Syfy, MSNBC, and CNBC. Conversely, cable channel Bravo, the NBC broadcast network, and streaming service Peacock will continue to be part of Comcast’s entertainment division, NBCUniversal.

11:50 a.m. ET saw Wall Street stock analysts swiftly expressing their opinions about the recent development. At that moment, Comcast’s shares were experiencing a slight uptick. However, the experts’ views on this news were divided.

Analyst Jessica Reif-Ehrlich from Bank of America generally held a positive outlook on the situation. She suggested that SpinCo could serve as a unification platform for cable networks within the industry. Furthermore, Comcast’s move might lessen regulatory worries about another possible merger with a significant cable competitor. This is what she expressed in her writing.

According to Reif-Ehrlich’s perspective, this move by Comcast can be seen as a strategic advantage because:

The Bank of America analyst, with a “buy” recommendation and a projected stock price of $50, asserts that due to its robust financial position and consistent cash flow generation, Comcast is expected to deliver substantial capital returns, making it an appealing investment choice.

Prior to the official announcement from Comcast, analyst Laurent Yoon of Bernstein expressed a note of caution regarding the anticipated news, based on reports that emerged late on Tuesday. Despite having a “market-perform” rating and a $48 price target for Comcast’s stock, his perspective was marked by a sense of caution.

It’s unlikely that SpinCo will significantly increase the overall value in the near future. The value of cable companies has decreased over time, and traditional media is consistently depreciating, which reflects in their current valuations. Given that traditional MVPD subscribers are declining by a high-single-digit percentage each year, it’s not expected that these entities will offer a significant increase in value.

Could the new entity potentially function as a bundling platform for additional cable channels? This action could serve to gather assets in similar circumstances that might not attract public market investors but still catch the eye of private market investors with a suitable valuation, as pointed out by Yoon. However, we won’t discuss what constitutes a ‘suitable’ valuation here; instead, let’s ponder, what would be a reasonable price for an asset in a state of continuous decline?

According to the analyst from Bernstein, “This move would have been beneficial a few years back when the values of both cable and media were much greater. Nevertheless, it’s better to act late than never.

Apart from conventional analysts on Wall Street, Madison & Wall’s principal Brian Wieser zeroed in on the implications of Comcast’s spin-off for its overall size. In an era where scale is increasingly crucial – whether for selling TV advertising or merging ad platforms to achieve maximum reach – if Comcast doesn’t have a strategic plan to invest the freed-up capital into expanding its remaining media business, or merge it with another company’s cable networks, this move could potentially be counterproductive, he suggested.

Wieser stated, “Currently, larger sellers tend to receive advertising budgets before smaller ones, as advertisers aim to avoid an excessive overlap in their audience. This trend may become more pronounced in the future, as marketers lean towards the most expansive digital platforms over traditional advertising outlets.

Distribution companies advantage from scale as they can negotiate higher prices due to their ability to offer a group of networks that distributors may not prefer individually, but accepting them grants access to desired networks. Additionally, content costs decrease when they can be spread over multiple platforms for distribution. In simpler terms, the larger the network a business manages, the more leverage it has in pricing negotiations and the lower the cost of providing content due to its distribution across various mediums.

Comcast announced on Wednesday that their upcoming cable network platform might serve as a prospective partner or buyer for other businesses in media, which would be complementary.

Wieser pointed out: “Once the company has been split off, if it gets sold or engages in further mergers and acquisitions, there will likely be fresh opportunities for other cable network operators (or even digital platforms, should they dare to attempt large-scale M&A under a new regulatory environment) to expand.

In a note dated October 31st, TD Cowen analyst Doug Creutz expressed his thoughts on the prospect of Comcast spinning off its cable networks. He suggested that this move would isolate a business that is mature and facing challenges, potentially merging with another company’s cable networks to gain more scale. However, he noted that such an endeavor might encounter regulatory obstacles.

On the same day, Macquarie analyst Tim Nollen expressed his thoughts as well. “By getting rid of the declining revenue from spinning cable networks, they could eliminate a factor that might be affecting their trading multiple. NBCU has been gradually lessening its focus on cable networks for some time, by exiting regional sports and moving content to Peacock.

However, he expressed concern about the independent worth of cable networks. He wondered if they’d still hold value without connections to NBCU’s studio and streaming services, or ad partnerships. Ultimately, his prediction was that mergers and collaborations within the industry could be a likely scenario.

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2024-11-20 20:58