Comcast splits with bright future ahead

Comcast, a US cable and media conglomerate, has decided to split into two separately listed entities. The decision is driven by the fact that the company’s business mix has shifted significantly since its merger with NBC Universal in 2011. At the time, Comcast was a video distribution business with 52% of its revenue derived from video subscriptions and only 23% from broadband.

Today, the situation is different. Video now accounts for 32% of cable revenue, while broadband and mobile business make up 37% of revenues. The decline of video’s share is even more pronounced when considering metrics like EBITDA and free cash flow, due to the richer gross margins on broadband compared to video.

The main driver behind the split is the shift in the business environment. When Comcast and NBC Universal merged, the goal was to hedge against content cost inflation and get involved in content valuation upside. However, as the business mix shifted towards data connectivity, the logic to stay together dissipated.

Another driver is the potential for better partners. Both Comcast cable and NBC Universal could benefit from new partnerships, free from the constraints of their current union. Comcast cable operates in a mature and competitive market, with fibre, fixed wireless, and satellite broadband eroding its once-dominant share.

A merger with another major cable operator, such as Charter Communication, could offer significant cost savings without the regulatory headaches of owning a media business. From a regulatory perspective, such a deal is unlikely to be problematic, unlike Comcast’s past attempt to acquire Time Warner Cable, which was facing new challenges in the market.

NBC Universal, often referred to as a “mini Disney,” has strengths in theme parks, movies, and sports content. However, as part of the overall Comcast entity, it trades at a lower valuation multiple than its peers, such as Disney and Warner Bros. Once separated, NBC Universal will be free to explore new partnerships and potentially command a higher valuation.

This is a significant issue for credit investors, as Comcast is a major issuer with $95 billion in debt outstanding. The lion’s share of this debt is expected to remain with the cable unit, which will also benefit from pre-close cash hoarding, a one-off dividend from the media unit, and the proceeds from the sale of 20% of the media unit equity.

The credit rating agencies have put Comcast’s A Stable ratings on Credit Watch Negative, implying potential ratings cuts. However, it’s not a disaster, as the cable unit should be able to maintain leverage in the mid-2x area and secure high BBB ratings despite the agencies’ increasingly sceptical view of the cable sector.

A subsequent tie-up between Comcast cable and Charter would be a massive transaction. The cable unit should be able to maintain leverage in the mid-2x area and secure high BBB ratings.

One thing is certain: the split will have significant implications for the US cable and media setting.

It will be interesting to see how the various players position themselves for future success in the growing media market.

Comcast’s decision to split will undoubtedly change the setting.