What took you so long? That was what some on Wall Street clearly wondered as they rejoiced about the Monday morning news out of Comcast‘s Philadelphia headquarters that the company would follow up its separation of Versant Media, the home of most of its cable networks, with another split. This time, Comcast plans to separate into two independent publicly traded companies through a tax-free spin-off of the media and entertainment NBCUniversal unit, along with its European media business.
Comcast shares popped on Monday, jumping 8.7 percent to $25.19 as of 10:40 a.m. ET after skyrocketing more than 20 percent before the market open, a sign that investors approved of the separation of the company’s media and telecom/tech businesses, maybe even shared a sigh of relief that it was finally coming.
“The split is especially desirable in assigning fairer immediate value to the Studio and Parks businesses,” offered Benchmark analyst Matthew Harrigan. And he estimated that a 20 percent-plus pre-market stock gain “only modestly reflects [the] eventual potential value for New Comcast and NBCUniversal.” In other words: he sees more upside.
The further division of assets comes at a time when the idea that the combination of content and pay-TV distribution under one roof provides a key strategic advantage and allows for “synergies” has lost its luster, even more so in the streaming and digital media age. It was one of the key drivers behind the deal that Comcast struck in late 2009 and closed in early 2011 to first get a controlling stake in NBCUniversal, before taking full control in 2013. Now, that last bastion of vertical integration is falling.
Since AT&T’s sale of WarnerMedia, Comcast/NBCUniversal has been the last big player with a strong presence in both content and traditional distribution. And in 2009, in unveiling the deal, Roberts called it “a perfect fit,” vowing that it would help “accelerate the development of new digital products and services.” But Comcast had always been less brash than others in the industry about promises of synergy, instead preferring to talk about “Symphony,“ its focus on cross-promotion efforts that put company-wide support behind content, services and projects that management deemed a priority.
A vestige of the combination of content and traditional distribution will live on inside the spun-off NBCU in the form of Sky, which combines Sky Studios and internet protocol- and satellite-delivered services. Harrigan noted the NBCU and Sky businesses’ “common emphasis on premium media and entertainment with powerful brands across entertainment, news and sports – especially in the U.K. and Europe.”
However, overall, the message from Comcast management was that focus and investment are now the keys to success.
That didn’t come as a shock to some who have long argued for a separation. “It’s no secret that we never bought into the strategic logic of Comcast’s acquisition of NBCU. There were plenty of synergies within NBCU, but those synergies never crossed the boundary between media and cable,” emphasized MoffettNathanson analyst Craig Moffett. “Having them under the same roof didn’t make either better, and the combined company has been saddled by a conglomerate discount for 15 years to reflect the suboptimal capital allocation that conglomerates demand.”
LightShed Partners analyst Richard Greenfield told CNBC: “For 14 years, the stock hadn’t moved. They had to do something.” And he added: “I don’t know anyone who wanted this company staying together,” except for maybe Roberts. “This is an admission that there is literally no synergy between Comcast and NBCUniversal. Those days are over.”
And Harrigan wrote: “We do not anticipate any material dis-synergies from the new transaction apart perhaps from some mildly increased two public entities corporate expense. … Each business retains significant scale with concomitant new latitude for focus, speed and strategic flexibility.”
Of course, the two more focused companies that Comcast and the new NBCUniversal will become could end up buying or selling to other players in their respective spaces. But management pumped the brakes on major imminent deal hopes. It was no surprise then that M&A options also featured in analyst reports on Monday.
Benchmark’s Harrigan focused on a key comment from Monday’s management call: “Designated new NBCUniversal CEO Mike Cavanaugh was adamant the separation is not a step toward further strategic transactions, a transparent reference to M&A with either a streamer or connectivity entrant.” Concluded Harrigan: “Both companies will build and invest for organic growth,” meaning a focus on growing without big deals.
After the major move unveiled on Monday, Comcast shareholders will end up owning shares in both the technology- and telecommunications-centric Comcast and media-centric NBCUniversal, which includes the Universal film and television studios, the NBC and Telemundo networks, streaming service Peacock, the Bravo cable network and the Universal theme parks division. Citing “rapidly changing markets,” Comcast said: “As technological innovation, consumer behavior and competitive dynamics continue to reshape both media and communications, … each company will be better positioned to pursue its own strategic priorities, invest for growth and create long-term shareholder value.”
Madison and Wall principal Brian Wieser wrote in reaction to the Comcast split: “It should be self-evident that there are real advantages to media companies focusing their efforts in either distribution or packaging.” But he also emphasized: “Of course, those advantages can only be realized when there is sustained investment.”
His take: “NBCUniversal may be better positioned to thrive in the media industry on its own rather than as part of Comcast, but only if it pursues opportunities by making ongoing investments. It’s worth noting that nearly half of NBCU’s EBITDA is generated by its theme parks business. One potential risk to the media business is that the new company overly prioritizes investment in theme parks rather than producing content and packaging it for consumers through a scaled-up version of Peacock.”
Brian Roberts will continue to be “actively involved” in the leadership of Comcast and NBCU, working in partnership with the CEOs of both companies. They are Mike Cavanagh, who will serve as the CEO of NBCU, and Michael Angelakis, who will become the CEO of Comcast, following the completion of the separation.
