Cagey Comcast Wants More Content–At The Right Price

Jul 14, 2003  •  Post A Comment

It is no surprise that Comcast Corp. has considered, but is not likely to act on, a bid for Vivendi Universal Entertainment, according to my informed sources. The scarcity of prime media properties such as VUE’s Universal Studios and the USA and Sci Fi cable networks will make the next wave of media deals just getting under way different from the past. There simply are fewer media players and fewer available properties.
That is why the conservative Comcast-which has remained steadfastly focused on upgrading the AT&T cable systems it acquired late last year and paying down its strapping debt-has privately mulled using some of the $8 billion in immediately redeemable stock and notes it will receive from the sale of its QVC stake to join a bidding war that involves Liberty Media Corp., General Electric’s NBC, MGM, and an investor group led by Edgar Bronfman Jr.
Comcast, which declined comment, recently agreed to sell its 57 percent stake in QVC to Liberty, its home shopping partner. Comcast has been clear about avoiding moves that could jeopardize its investment-grade rating. Comcast officials also have said they prefer to organically grow content (the company is forging a new African American cable network with Radio One) rather than pay lofty premiums for branded cable networks or programming. In the past six months, Comcast has shown it can skillfully leverage its newfound scale in negotiations with formidable program providers such as Walt Disney’s ESPN.
But Comcast also now realizes that despite its clout, it needs enough key content ownership and control to ensure cost-effective access to what its 21 million subscribers want. That is the most intriguing, if not the most critical, competitive challenge Comcast faces.
With an estimated $2 billion in free cash flow restored to its balance sheet in 2004 and its outstanding debt steadily shrinking to below $20 billion, Comcast will re-emerge as a cautious, targeted acquirer by next year. Indeed, some experts said it must.
To be sure, Comcast will swap, partner and acquire new systems where it can to strengthen its existing clusters from distressed cable operators such as Adelphia Communications and Charter Communications, tapping $1.3 billion in unconsolidated cable cash flow and 2.2 million unconsolidated cable subscribers. It will invest to completely convert its cable platform to digital and control new broadband services to be more of “a technology leader than a follower,” Comcast President Brian Roberts said.
Comcast also will continue to maneuver select content deals. Sources said it is negotiating to acquire stakes in some of Cablevision Systems’ regional sports operations, and that it could jointly bid with Fox Entertainment Group for National Football League and other professional sports broadcast rights.
Comcast Pursuing Disney?
On a grander scale, there is the perennial and logical speculation that Comcast eventually will bid for the struggling Walt Disney Co., whose broadcast and cable networks, studio, radio stations and television stations would be powerful enhancements. Comcast’s adept fiscal and operating management, and the familiarity with the assets of Comcast Cable President Steve Burke, formerly of Disney, would give such a merger a good chance to succeed. Such a deal, if it were to happen, is at least a year away, sources said.
In the meantime, the deal marketplace clearly is heating up.
Capital is available and affordable, and investment bankers are all too eager. Catalysts include a new round of deregulation, low interest rates and overleveraged companies that must sell. A big impetus is the generally sluggish growth rate for media revenues and profits that can only be bolstered by the intense cost cutting that comes from massive consolidation.
Mergers and acquisitions aren’t just about expanding business lines and franchises. Managed correctly, these transactions must also provide new ways to better manage costs to boost profits. That is what Comcast is doing.
Clearly, the QVC and VUE deals are just opening salvos in a new wave of deal-making that will reshape companies (which is Liberty’s stated intent), make players more powerful by increasing scale (the goal of many broadcast station group owners) and create new gatekeepers (News Corp.’s mission in acquiring a controlling stake in satellite provider DirecTV).
That is going to make media a whole new ball game a year or two from now as these M&A moves play out across a digital, interactive game board.
But it is critical that the deal-making not get ahead of corporate balance sheets.
The latest quarterly earnings that public companies will report over the next month are likely to indicate that not everything is ripe to support as wild and crazy a deal market as we have known before. The balance sheet fundamentals that companies have been loath to tout or project from are the bases for the valuations that will drive the deals.
Media companies, many of which have withdrawn or declined to issue quarterly or full-year earnings guidance, will remain conservative in their approach to future growth and spending. Too many formidable micro- and macro-uncertainties still loom large-from rising unemployment and declining consumer confidence to lagging new-service adoption (with high-speed data being the obvious exception) and uneven advertiser spending across all media segments. They need confidence in the markets to use their stock as deal currency.
It is imperative for companies to know that an economic and market recovery and their own financial fundamentals are solid before launching into deal mode as hostile or friendly suitors or willing sellers. It appears that Comcast understands that better than most.