Comcast (NasdaqGS: CMCSA) made headlines on three fronts yesterday: it snapped up the 49% of NBCUniversal that it didn’t already own from General Electric (NYSE: GE); it posted strong fourth-quarter results; and it hiked its dividend by 20%.
First, the buyout: in one sense, the move wasn’t totally surprising, because Comcast planned to take full control of NBCUniversal since it bought its original 51% stake two years ago. However, it had been expected to do so in a piecemeal fashion over seven years.
“We thought that we would have to pay more later,” Comcast CEO Brian Roberts told the Associated Press on Wednesday. “We really have known we wanted to buy 100% from the beginning of the transaction. We wanted to learn the business. We feel that now is an opportune time.”
NBCUniversal operates in a bewildering number of entertainment and media businesses. It owns TV stations and television networks (including NBC, CNBC, Bravo, E! and the Golf Channel), as well as NBC Entertainment, which develops programming for the network, including hit shows like The Office, 30 Rock and The Voice. In addition, CNBC operates Universal Studios and other film production houses and a number of websites, including online video service Hulu.com. It also owns theme parks, including Universal Studios.
“Make no mistake,” Investing Daily’s Roger Conrad wrote when the FCC approved Comcast’s purchase of its original 51% stake in January 2011. “This is a good deal for the company and puts it in prime position to continue leveraging its network for big cash flows. That means more growth, higher dividends and more stock buybacks, all of which will push the stock higher over time.”
A little over two years later, Conrad’s prediction has come true: the shares are up 76.8% since then; in 2012, Comcast bought back 95.7 million of its shares for $3.0 billion, and it plans to buy another $2.0 billion worth in 2013. Cash flow, too, is on the rise: in the latest quarter, Comcast’s operating cash flow jumped 7.3% from a year ago, to $5.3 billion.
For its part, the market saw both buyer and seller as winners: Comcast shares rose 3% yesterday, while GE stock gained 3.6%.
Did GE Settle For Too Little?
Under the agreement, Comcast will buy General Electric’s 49% stake in NBCUniversal for $16.7 billion. In a separate deal, it will purchase CNBC’s headquarters in New Jersey and the space used by NBCUniversal at 30 Rockefeller Plaza for $1.4 billion. It will fund the deal with $11.4 billion of its own cash, $4.0 billion of subsidiary senior unsecured notes issued to GE and $725 million in preferred stock. It will borrow a further $2.0 billion. The companies expect the deal to close by the end of the first quarter.
The purchase price raised some eyebrows in the investment community; As the Financial Times pointed out, the original deal valued all of NBCUniversal at around $37 billion, meaning the price that Comcast paid for the rest of the business is little changed since then.
“Comcast is paying essentially the equivalent to what it paid for half of the asset two years ago, despite 24 months of turnaround,” Bank of America Merrill Lynch analyst Jessica Reif Cohen wrote in a note to clients quoted by TheStreet.com. “We believe the asset is worth more, and there is clearly value in owning 100% of an improving business.”
Another indicator that the market may be placing a higher value on NBCUniversal is Comcast’s recent sale of its 15.8% stake in the A&E network for $3 billion to The Walt Disney Company (NYSE: DIS) and Hearst Corp. Comcast had earlier estimated that this interest was worth just $2 billion. Comcast acquired the A&E stake when it bought its majority interest in NBCUniversal.
The purchase will also immediately add to Comcast’s profits. “We believe consolidation of NBCU creates shareholder value,” wrote Brean Capital analyst Todd Mitchell in a note quoted by istockanalyst.com. “Our initial analysis shows that the deal should offer upwards to $0.20 in potential accretion in 2013, implying 2013 EPS of approximately $2.35, versus our prior estimate of $2.15.”
Comcast Earnings Highlight NBCUniversal’s Strength
A strong performance from NBCUniversal was a highlight of Comcast’s fourth quarter earnings, which it reported in advance of the buyout: in the fourth quarter of 2012, the company’s overall revenue rose 5.9% from a year ago, to $15.9 billion. Cable revenue gained 7.0%, to $10.1 billion, while NBCUniversal’s revenue increased 4.8%, to $6.0 billion.
Overall earnings per share rose 19.1%, to $0.56 from $0.47. That topped the consensus forecast of $0.53, though Comcast fell just shy of Wall Street’s revenue expectation of $16 billion.
NBCUniversal saw revenue growth across all of its businesses. Filmed Entertainment led the way with a 9.0% gain, thanks to strong results from Les Miserables and other films, along with strong home entertainment revenue from Ted and The Bourne Legacy. Broadcast Television revenue rose 7.9% due to higher ratings and increased political advertising leading up to the election. NBCUniversal’s operating cash flow surged 11.4%, to $1.17 billion.
In addition, Comcast hiked its dividend by 20%, to an annual rate of $0.78 a share (for a 1.94% yield).
According to a report from wsj.com Wednesday, Comcast will increase its investment in NBCUniversal by about 25% this year, with much of that spending going into new attractions at the company’s theme parks. This investment should pay off as the economy picks up and boosts recreation and leisure spending.
Comcast’s balance sheet is also healthy enough to handle the buyout: partly due to the sale of the A&E interest, its total cash and investments jumped to $12.4 billion from just $1.67 billion a year ago; long-term debt is holding steady at $38.0 billion.
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