Cable provider Comcast (CMCSA) announced that it will acquire the 49% stake of NBCUniversal that it doesn't already own for $16.7 billion from General Electric (GE). The company will also acquire the famous 30 Rockefeller headquarters in Manhattan and CNBC's Englewood Cliffs headquarters for $1.4 billion. The deal had long been anticipated to occur in the future, but it appears to have closed earlier because Comcast feared the price might rise.
Rarely do deals seem like a "win-win" for both parties, but we like this deal for both Comcast and GE. GE now has largely purged itself of its diverse conglomerate past, leaving it more of an industrials and financials pure-play. The firm also received a huge cash infusion, $4 billion in senior unsecured notes, and $725 million in preferred stock from Comcast. The firm will post a pre-tax gain on sale of assets of $1 billion (though that will be offset by restructuring charges). More importantly, GE expanded its buyback program to $35 billion, and it plans to spend $10 billion in 2013 alone. Though one can argue NBCUniversal's valuation might increase over the next few years, we think it was wise for GE to do the deal while it was on the table. Financing won't remain cheap forever, and waiting a few years could potentially have resulted in financial deterioration (under uncertain macroeconomic conditions) that would have possibly prevented a deal.
For Comcast, we think the deal was a no-brainer. The acquisition will be immediately accretive to free cash flow, but more importantly, we believe owning content will be an increasingly more valuable endeavor. With more avenues for distributing content, we see the price and value of content rising over the next several years. NBCUniversal owns, produces, and develops tons of content for Comcast to distribute. The deal also augments Comcast's vertical integration, which should help increase free cash flow. We believe this transaction also gives the firm a competitive advantage over other content distributors.
On the financial side, NBCUnivsersal posted a fantastic 2012, led by revenue increasing 12.7% year-over-year to $23.8 billion, and operating cash flow advancing 10% to $4.1 billion. At the implied valuation, Comcast purchased the stake for a 12% operating cash flow yield that looks poised to grow-not bad considering that the $11.4 billion worth of cash used for the deal wasn't returning much on the balance sheet. Since the deal will be accretive immediately, the company didn't add much risk to its balance sheet, in our view, even though it increased borrowings by $6 billion. Comcast clearly doesn't think that its risk profile has increased, as it announced it will repurchase $2 billion worth of stock (while increasing its dividend 20% to $0.78 per share annually). We expect to update our dividend report soon.
In addition to improved content scale and integration, we think the deal helps to de-risk Comcast's business model. The firm is mostly dependent on cable and internet services, both of which face potential cannibalization. Services like Netflix (NFLX), Amazon Prime (AMZN), and Hulu represent long-term threats to the current cable model, while the FCC building a nationwide Wi-Fi network could significantly impair Comcast's internet services. Owning content helps Comcast weather the storm if either business segment comes under heavy assault.
Although the Justice Department has scrutinized deals for antitrust violations a bit more closely during the past few months, we doubt there will be any problems with this deal gaining approval from regulators. Further consolidation and mergers between content distributors and content creators are likely to occur, but we think regulators could eventually intervene-particularly if we saw a megadeal between someone like Time Warner (TWC) and Disney (DIS).
Overall, we like the deal for Comcast and GE, and we'll be taking a close look at our valuation models for both. We expect to make some changes (as a result of the transaction), but shares of both companies remain fairly valued at this time (their stock prices fall within our estimate of their respective fair value ranges). Still, we continue to evaluate GE for addition to the portfolio of our Dividend Growth Newsletter on the basis of its valuation upside potential (its fair value is higher than its stock price) and growing dividend payout.