New Comcast Model Shows Results on Bottom Line

Mar 10, 2003  •  Post A Comment

Comcast Corp. is raising the bar on the media industry’s expectations for merged players by creating a new business model that makes an uneasy comparison for faltering rivals such as AOL Time Warner.
In a nutshell, it is all about sticking to the core business, improving the basics before expanding through acquisitions, underpromising and overdelivering profits, effectively integrating operations and unifying personnel.
In fact, Comcast executives privately concede they are exceeding their own initial expectations since acquiring AT&T Broadband late last year, partly because they are determined not to repeat the post-merger mistakes still hindering AOL Time Warner two years after its union.
In just three months Comcast has begun to reduce its strapping $25 billion debt by $5 billion, achieved $500 million in job cuts and other downsizing, found $270 million in program savings, curtailed AT&T system upgrade costs by 20 percent to $4 billion, and vowed to reverse an unprecedented 500,000 in basic subscriber losses at AT&T.
As a result, Comcast will boost its cash flow by at least $1.35 billion to $6.3 billion in 2003 on a 9 percent increase in revenues to $23 billion and likely return to free cash flow. Merrill Lynch analyst Jessica Reif Cohen said Comcast is making such good progress, it could muster more than $500 million in free cash flow and $7.35 billion in earnings before interest, taxes, depreciation and amortization this year.
The more than $2 billion in annual free cash flow Comcast should begin generating again in 2004, after a merger transition year, is the growth fire power media companies desire.
Until then, Comcast is learning to leverage its newfound scale. Over the next two months, Comcast will announce new deals with some program suppliers, getting contract extensions and high definition and video-on-demand rights in exchange for reducing current licensee fees based on its near tripling in size. It considers high-definition and VOD programming critical weapons in combating satellite competitors.
“Our focus right now has been on execution and integration,” Brian Roberts, Comcast chief executive officer and president, said in an interview. “There is very little likelihood you will see any mega-deal-making coming out of us. We are so focused on doing what we said we were going to do.”
“We always can be opportunistic if something great comes along,” he said.
But Comcast may be handed its most significant near-term opportunity by partner Liberty Media Co., whose triggering this week an appraisal and potential sale of their co-owned QVC could render more than $8 billion for Comcast’s 58 percent stake. Those proceeds could be used to further reduce Comcast’s debt to well below $20 billion, giving the cable operator the flexibility to acquire the content companies it needs. Sources say Comcast could bid for Hollywood independents or majors.
Liberty could use proceeds from the sale of its 42 percent QVC stake to finance its pursuit of General Motor’s $3 billion, or 20 percent, stake in Hughes Electronics and its DirecTV satellite unit. But Liberty, a 20 percent shareholder in USA Interactive, also could fold a wholly owned QVC into a home shopping powerhouse with USAI’s HSN. Or it could include QVC in a new content entity formed with some of Liberty’s own assets (such as Starz Encore and Discovery Communications) and some of the assets it has been eyeing at Vivendi Universal Entertainment (such as the Sci-Fi and USA cable networks). Liberty’s $11 billion in cash and securities is sufficient to buy both QVC and DirecTV.
That Comcast is positioned to be the beneficiary of so much so soon is no accident. In the nine months before buying AT&T, Mr. Roberts, Comcast Cable president Steve Burke and others toiled diligently on the integration and streamlining of operations and personnel that is now being achieved.
Mr. Roberts points out that certain other things help: AT&T represents expansion of a core cable business, in which Comcast has previously achieved 40 percent margins and cost-efficient acquisitions, and it waited until this week before projecting a modest upside in 2003. “At least now we know what we’ve got,” he said.
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