Comcast: Acquistion For Vertical Integration

| About: Comcast Corporation (CMCSA)

Summary

Comcast has achieved great success in terms of fundamental growth year over.

Comcast has a history of smart acquisitions.

Expect CBS and Viacom to be acquisition targets.

Overall Comcast is still a buy and long term hold.

Despite facing external pressures, Comcast (NASDAQ:CMCSA) stock has reached all time highs. Comcast has shown investors that it is able to prevent cord cutting, adapt to over-the-top providers, and grow market position for cable services despite industry consolidation. Moreover, Comcast is a cash flow rich conglomerate that is well leveraged. Operating cash flow has increased from $14.16B in 2013 to 18.778B in 2015. Additionally, the debt to equity ratio was .94 at the end of 2015, indicating that such a large company finances its operations with more equity than debt (a relatively impressive feat). Not to mention, that management has been able to deliver consistently superior returns over the last decade. ROIC increased from 3.04 to 9.58, ROE increased from 6.22 to 15.55, and ROA increased from 2.37 to 5.01 (all figures from 2006 to 2015). Consequently, it can be interpreted that Comcast has strategically deployed capital to deliver consistently superior returns, such as the successful NBC Universal acquisition in 2010. Recent stock prices, indicate that investors believe the DreamWorks acquisition will have similar success in terms of returns and integration.

This article will argue that Comcast will potentially acquire Viacom VIAB and/or CBS over the next few years. Also, this article will explain why either deal would make sense and further solidify Comcast's superior positioning in content creation/distribution. The benefits of acquisition are:cross-promotion opportunities of entertainment properties in theme parks, reduced programming costs, greater leverage with over-the-top providers, benefits of further consolidating content creation space, and overall economic incentives for all parties.

Cross Promotional Activities: One primary reason in acquiring DreamWorks was because of the ability to promote DreamWorks's iconic properties in theme parks, such as Shrek, Fast and Furious, etc. The success of Harry Potter World at Universal Studios illustrates that Comcast understands movie property integration into theme parks can drive revenue in a high margin business. Both CBS and Viacom are rich with media properties that could be deployed in the same manner.

Reduced Programming Costs: Comcast's 10-k for 2015 states that programming and production expenses were $22.550B and total company revenue was $74.510B. Comcast has said that it would like to produce 80% of the content that it offers, which would help control retransmission fees. Hence, CBS and Viacom are both opportunities to acquire more ubiquitous channels, such as various Nickelodeon properties, Comedy Central, MTV, VH1, SPIKE, BET, CMT, TV LAND, LOGO, CBS. In addition, CBS has 30 broadcast television stations, owns and operates 117 radio stations, 26 U.S. markets and related online properties, and operates local digital properties.

Greater Leverage with Over-The-Top Providers: Netflix, Hulu, Amazon, etc. cannot make all of the content they provide to their subscribers and cable networks/movie producers will continue to be an integral source of content. Hence, it would be advantageous for a cable services provider like Comcast to control even more content. This will help them garner leverage in the war on cord cutting (more partnerships like the one with Netflix) and will ensure that Comcast subscribers will always have access to vast a library of content at affordable prices. Comcast could also ensure that their service StreamTV is well positioned. That is, subscribers to StreamTV would have access to even more content at a moment's notice. Also, the reduced programming expenses will help Comcast offer their video services at more competitive prices. This will assuage the need to raise prices in order to maintain margins. Ultimately, leading to the win-win of diverse content availability at cheap rates for subscribers.

Content Creation Consolidation: Naturally, with all of those cable networks controlled by one company, economies of scale and synergies that would arise. For example, Comcast could generate further vertical integration (by being a content distributor and creator) to maximize utility. For example, as a content creator it would benefit from the fees paid by other distrubtors and it would also benefit as distributor by controlling content creation (costs).

Through acquiring CBS, Comcast would also be able to obtain rights to special events at a higher frequency, such as the Super Bowl. This would provide more periodical injections of revenue and cash. Simply, these events provide major opportunities to capture lucrative advertisement revenues.

Economic Benefits: Comcast recently attempted to acquire Time Warner Cable for $45 billion. Hence, it has capital to deploy to make strategic acquisitions for the future. Currently, Viacom has a market cap of approximately $17.3 billion and CBS of $23.2 billion. Consequently, even with valuation multipliers, either or both fall within Comcast's acquisition range. Moreover, Comcast valued NBC Universal at $30 billion in 2010. That deal turned out to be a home run for Comcast. NBC Universal generates $28 billion of revenue and net income of $3.414 billion for Comcast in 2015. CBS currently has a P/E of 15.43, so if you applied that multiple to NBC then it has an approximate current market cap value of $53 billion.

Additionally, Viacom and CBS have suffered in terms of stock price and earnings. Hence, shareholders could look for an opportunity to exit at a multiple. Also, assuming CBS/Viacom investors would gain shares in Comcast, a merger would be a promising and stable proposition. For example, in 2014 Viacom was trading at highs of $88 per share and currently it is at $43.68. Moreover, net income is down from $2.15 billion in 2011 to $1.92 billion in 2015. CBS has performed better in terms of stock price and net income. However, the Redstone family (which has been embroiled in controversy) controls both companies. The Redstone's control approximately 80% of the voting stock for both companies, which could lead to a sale by Sumner Redstone's heirs.

In Summary: Comcast, to me, is still a buy and is in a really stable/promising position for the future. I believe cord-cutting fears have been assuaged over the years and Comcast has shown it can adapt to find new ways to build for the future (NBC/DreamWorks acquisitions). I expect Comcast to acquire either a telecom company or more cable networks. CBS and Viacom are two companies that make a lot of sense and could certainly be a value added in Comcast's quest to continue growth, lower costs, and innovate for the future.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.