Wall Street today reacted with concern to late Wednesday news that cable giant Comcast Corp. is eyeing a potential acquisition of at least part of NBC Universal.
Comcast shares tanked 7 percent in early Thursday trading.
While having its benefits, “a deal would play to investors’ worst fears about Comcast’s capital allocation,” said Sanford C. Bernstein analyst Craig Moffett in a note to investors. “Investors have long pressed Comcast for an aggressive return of cash to shareholders. An acquisition of a major content studio, even if consummated at an attractive price, is most decidedly not what Comcast investors had in mind.”
On Tuesday, before any of the deal talk emerged, Pali Research analyst Richard Greenfield had similarly mentioned investors’ fears of a big content acquisition by Comcast. “We sense investors remain concerned with the company’s capital allocation strategy,” he wrote. “Investors are clearly more concerned about the risk of Comcast making a large acquisition in the next 12 months than they are [about] Time Warner Cable, which we sense has led to a rotation from Comcast shares into TWC.”
Wall Street chatter Thursday morning focused on how Comcast was unlikely to buy all of NBCU. Instead, talk focused on a play for about 50 percent, which would mean the cable giant would acquire part of the 80 percent stake in NBCU controlled by General Electric plus a 20 percent stake that Vivendi is expected to decide to sell during an annual sales option window that starts in mid-November.
“I don’t think a whole acquisition makes sense, thinking how Comcast shareholders would react,” said Miller Tabak analyst David Joyce. Others also mentioned that the estimated price tag of $30-35 billion for all of NBCU, including a control premium, would be too high for Comcast, whose executives have in recent months signaled the company wouldn’t issue new debt or stock to fund acquisitions.
One Wall Street source said Comcast has the cash to buy Vivendi’s 20 percent stake for $4-5 billion, with an option to later take full control. But such a transaction “would include all of the regulatory burdens but none of the benefits,” suggested Moffett.
“Arguably, their ability to shape online content distribution [via a stake in Hulu, etc.] and to recast windows for video on demand would be an important attribute of any deal,” he said in mentioning potential deal benefits for Comcast. “On the other hand, any acquisition would almost certainly come with many strings attached.”
He said that any big content deal for Comcast would likely include regulatory conditions that “would make it exceptionally difficult to create value.” Such conditions would likely include binding arbitration and no-blackout provisions in the case of programming disputes, he said.
“Cross-ownership of NBC broadcasting stations in Comcast’s regional markets, such as Philadelphia, Chicago and San Francisco, would also pose significant regulatory challenges,” the analyst added.