Comcast splits with suitors waiting
Comcast, a US cable and media conglomerate, has decided to split into two separately listed entities, marking a significant change in the company’s structure. This decision is largely driven by the shifting business mix, with video subscriptions now accounting for only 32% of cable revenue, down from 52% in 2011.
The company’s broadband and mobile business now account for 37% of revenues, with richer gross margins compared to video, which is encumbered by rising content costs. Changing business conditions have led to this shift.
When Comcast and NBC Universal merged in 2011, the primary goal was to hedge against content cost inflation and participate in content valuation upside. However, as the business mix shifted from video to data connectivity, the logic to stay together gradually dissipated.
They operate in an increasingly mature and competitive market, with fibre, fixed wireless, and satellite broadband nibbling away at cable’s once dominant share.
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Charter Communication, another major cable operator, shares this pain as a mature market leader, and a potential merger could offer significant cost savings without the baggage of owning a media business.
From a regulatory perspective, a deal between Comcast’s cable business and Charter is not expected to be problematic, unlike Comcast’s previous attempt to acquire Time Warner Cable, which was blocked.
The media business, on the other hand, is a more attractive prospect, with strength in theme parks, movies, and sports content, similar to a smaller version of Disney.
Valued at only 5x EV/EBITDA, compared to Disney’s 10x and Warner Bros.’ 13x, the media business may be able to attract new partners and potentially merge with larger, better-capitalized players.
For credit investors, this split is a significant issue, as Comcast is a major IG issuer with $95 billion debt outstanding, and Charter has a massive $85 billion IG and $27 billion HY debt pro forma.
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Most of the debt is expected to remain with the dominant cash-generative cable unit, which may benefit from pre-close cash hoarding, a one-off material dividend from the media unit, and the proceeds from the sale of 20% of the media unit equity.
Credit rating agencies have put Comcast’s A Stable ratings on Credit Watch Negative, implying ratings cut(s) to come, but it’s possible for Comcast to maintain leverage in the mid 2x area and secure high BBB ratings.
A subsequent tie-up with Charter would be a monster transaction with a potent
Media’s life post-split will likely be more colorful, with a variety of possible dance partners and roles as acquiror or acquiree, and it may attract the interest of larger, better-capitalized players that typically reside in the single A rating category.
