Comcast Seeks Content & Distribution - Analyst Blog

Comcast Corp. (CMCSA) is all set to become a media powerhouse armed with a unique control over both content and distribution network.

Yesterday, in a history setting development that may change the whole landscape of the media/pay TV industry, the U.S. Justice Department and five state attorney generals together with the regulator Federal Communications Commission (FCC), approved the proposed acquisition of the majority stake of NBC Universal by Comcast. The deal is now expected to be finally completed by the end of January 2011.

On December 12, 2009, Comcast announced that the company decided to purchase 51% stake of NBC Universal from General Electric Co. (GE) for a total consideration of approximately $13.75 billion.

Comcast will pay $6.5 billion in cash and contribute cable channels worth $7.25 billion for its 51% stake in NBC Universal. General Electric will hold the remaining 49% and it will have the option to sell half of its stake in NBC Universal after three and half years and another half after another three and half years.

This deal had generated massive controversy and hectic lobbying by Comcast and several related parties, who were against the merger. It took more than 13 months by the regulators and the Justice Department to clear all hurdles subject to some restrictions, which Comcast has to obey in order to protect the nascent online video market and maintain fairness with other pay-TV operators. Meanwhile, the European regulatory has already approved the deal.

NBC Universal includes the flagship NBC TV network, the Telemundo Spanish-language network, Universal Pictures and theme parks, and about two dozen cable channels. Comcast will be able to serve one-fourth of the U.S.'s pay-TV households supported by a large content-creation empire.

NBC Universal is the U.S.'s fourth largest media company enriched with vast content library. This will help Comcast to expand its own video-on-demand opportunities.

A major growth area for Comcast will be the advertising revenue. Ongoing positive trend is likely to continue in the near future due to an improving U.S. economy. Comcast is currently generating around $2.5 billion in total advertising revenue per annum. After acquiring majority share of NBC Universal, that figure may soar to more than $10 billion per annum.

However, as a result of this acquisition, Comcast will have to forego the voting right of Online TV channel Hulu. NBC Universal controls 30% of Hulu and can retain that stake without its voting right.

Furthermore, to protect the online video providers, such as Netflix Inc. (NFLX), and Apple TV of Apple Inc. (AAPL), Comcast may be required to provide those companies with content, assuming they have already cut deals with other content providers.

We believe merger with NBC Universal not only give Comcast a competitive edge over its pay-TV rivals but also place the company head-on with media giants like Walt Disney Co. (DIS) and News Corp. (NWSA). Comcast, which is known for highly efficient management tactics, may now significantly develop NBC Universal's sports and movie theaters that collect hefty fees from cable operators.

Currently we maintain our long-term Neutral recommendation on Comcast and a short-term Zacks #3 Rank (Hold) on the stock.

 
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