Last month, Comcast (NASDAQ:CMCSA) purchased the remaining 49% of NBCUniversal from General Electric (NYSE:GE) for about $16.7 billion. In 2011, Comcast acquired 51% control of NBCUniversal for $30 billion and GE had the remaining stake. Now, with the purchase of GE's stake in NBCUniversal, Comcast has fully acquired NBCUniversal.
NBCUniversal has signed another deal with GE to acquire CNBC's headquarters in New Jersey and its (NBCUniversal's) office in 30 Rockefeller Plaza in New York City for about $1.4 billion. This deal is in line with the strategy of Comcast to strengthen its position not only in the cable and Internet television industry but in the media and entertainment industry as a whole.
What's In It For Comcast
With the acquisition of NBCUniversal, Comcast added the different business segments of NBCUniversal to its stable. The business segments include: cable networks, which include the regional, national and international cable networks; NBC's broadcast network; operations of Universal Pictures in the production, acquisition, marketing and distribution of films globally, and theme parks, mainly the Universal theme parks in Orlando and Hollywood.
NBCUniversal is one of the biggest entertainment companies in the world. Comcast is poised to grow by this acquisition.
What's In It For Investors
For investors, what is important to understand here is the commitment that Comcast has shown - with this move - to the cause of content creation. As I have repeatedly stated here before, content creation is the future of all companies that were previously engaged only in content distribution. In fact, one is the logical step from the other - and those companies that do not take that step will stay behind.
Buying out 49% of a company that they owned 51% of earlier isn't the most important thing. What is important is getting complete ownership of NBCUniversal, down to its 2 office buildings. Don't be surprised if you get to see Comcast overhauling NBCUniversal and giving it a shape much more attuned to Comcast's business. Customer-friendly discounted packages may be one way to go, and/or finding other synergies. In short, whatever happens, this is the acquisition of a company they know out and out. So, I am pretty sure this will be a better-managed acquisition than some failures we have seen earlier from other companies. All that translates to better reasons for shareholders to stick around and investors to jump in.
Comcast's Motive Behind NBCUniversal's Acquisition
Diversify its offerings
Traditionally, Comcast has been a cable and Internet TV provider. Its largest business segment is cable communications, which through Comcast Cable offers video, Internet and voice services to customers under the XFINITY brand. It provides bundles of various services as a package to customers.
Comcast has been a market leader in the TV business, which is saturated with many players. The various competitors of Comcast include cable players like Time Warner Cable (NYSE:TWC), satellite TV providers like DirecTV (DTV) and DISH Network (NASDAQ:DISH), mobile operators like AT&T (NYSE:T) and Verizon (NYSE:VZ). So, the competition is intense.
Also, a disruptive innovation like the expansion of fiber optics in the Internet TV industry has a potential in the long term to erode the market share of Comcast. In the future, fiber optics may prove to be a better replacement of cable as the requirement for high-speed Internet rises. Fiber has an advantage over cable as it can support very high speed networks of more than one gigabit. Google (NASDAQ:GOOG) has already successfully tested its Google Fiber in Kansas City. Google Fiber's tariff plan is highly competitive as it offers 50 times fast Internet at only an additional $10 as compared to Comcast's tariff plan.
Comcast has to diversify its operations in order to strengthen its business. With the acquisition of NBCUniversal, Comcast has diversified its offerings to the other avenues of the media and entertainment industry. Comcast is trying to transform itself from a pure play cable and Internet TV provider to a full-fledged entertainment company.
Shift towards content creation
The cable TV and Internet industry is experiencing a shift in the power towards content providers. With the emergence of online streaming and advancement in technologies, content has become vastly important. NBCUniversal's cable network consists of a portfolio of 15 national cable networks, 11 regional sports and news networks and various other international channels. NBCUniversal's Cable Networks and Broadcast Television Segments are into content licensing of their own programming content to companies like Netflix (NASDAQ:NFLX) etc. The acquisition of NBCUniversal makes Comcast a content creator and content distributor rather than only being a content distributor as it had been in the past.
Access to huge advertising revenues
One major thing, which Comcast will gain from its acquisition of NBCUniversal, is that it will provide Comcast access to the huge advertising revenues of the television and media industry. In 2012, the total advertising revenue of NBCUniversal was $9.265 billion. The maximum advertising revenue of $5.842 billion came from the Broadcast Television Segment and the Cable Networks segment had the advertising revenue of $3.423 billion. This is a very lucrative advantage to Comcast.
Financial Performance of both businesses
In 2012, Comcast reported a 12% increase in revenues to $62.6 billion. Its operating income increased to $12.2 billion marking a 13.6% increase over the previous year. Cable communication has been the largest business segment for Comcast with revenues of $39.6 billion in 2012.
NBCUniversal posted total revenue of $23.8 billion, which represents about 38% of the total revenue of Comcast. This is a substantial share of the revenue. Within NBCUniversal, cable networks is the largest segment in terms of revenue with revenue of $8.7 billion in 2012. The biggest growing segment of NBCUniversal is its broadcast television, which grew its revenue by 27.4% from $6.39 billion in 2011 to $8.15 billion in 2012. The total operating income for NBCUniversal increased 9% from $3.76 billion to $4.10 billion.
The financial performance of NBCUniversal is sound and with the full control over the operations of NBCUniversal, Comcast is poised to grow its revenue in the long term. The acquisition of NBCUniversal is a good deal for Comcast and is in line with its strategy of diversifying its business operations.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: StockRiters is a team of analysts. This article was written by Sahil Saini - BTech in Electronics and Communication, ITM Gurgaon, MBA in Finance, IIFT - one of our analysts, and edited by Shas, StockRiters' Editor-in-Chief. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.