Comcast’s Cable Channels Spin Off Gets Mixed Wall Street Reaction

“A real opportunity to invest and build additional scale” and a “new growth trajectory.” Those are some of the things the Brian Roberts-run Comcast promised on Wednesday in unveiling its plan to spin off most of its cable channels, formerly a key profit growth engine, into a separate company.

The new entity, led by Mark Lazarus, will include the likes of USA Network, Syfy, MSNBC, and CNBC, while cable channel Bravo, the NBC broadcast network, and streaming service Peacock will remain part of Comcast’s entertainment arm NBCUniversal.

Wall Street stock analysts didn’t waste any time sharing their takes on the move. As of 11:50 a.m. ET, Comcast shares were slightly higher as experts had mixed reviews of the news.

Bank of America analyst Jessica Reif-Ehrlich was mostly bullish on the development. “SpinCo could be used as a consolidation vehicle for cable networks across the industry. This move by Comcast may also reduce regulatory concerns about another attempted potential merger with a large cable peer,” she wrote.

“In our view, this is a positive strategic step for Comcast as it (1) indicates a willingness by Comcast to unbundle slower-growing assets while, (2) potentially creating an entity that can gain scale to limit declines/drive growth and (3) offer healthy capital returns through a dividend, (4) should be accretive to Comcast parent growth, and (5) may reduce the regulatory hurdles enough for Comcast to potentially attempt another large cable merger,” Reif-Ehrlich explained.

Maintaining her “buy” and $50 stock price target, the BofA expert concluded: “Supported by its strong balance sheet and healthy free cash flow generation, Comcast should drive solid capital returns and … is attractively valued.”

Before Comcast made things official, Bernstein analyst Laurent Yoon, who has a “market-perform” rating and $48 price target on Comcast’s stock, weighed in on the expected news following late Tuesday reports with a big dose of caution.

“We do not anticipate the SpinCo to be accretive to the consolidated valuation, at least not a material one, in the foreseeable future,” he wrote. “(The) cable multiple has contracted in recent years, and legacy media is in perpetual decline with corresponding valuation multiples today. With traditional MVPD (multichannel video programming distributor) subscribers declining by high-single-digits per year, the valuation of the two entities is unlikely to provide a meaningful upside.”

How about the idea that the new entity could become a roll-up vehicle for more cable channels? “What this move does create is a vehicle to further consolidate assets in similar situations that may not be appealing to public market investors but interesting enough to private market investors at an appropriate valuation,” Yoon highlighted. “We won’t debate here what would be an ‘appropriate’ valuation, but what would you put on an asset in perpetual decline?”

Concluded the Bernstein analyst: “The move would’ve been value accretive a few years ago when both cable and media multiples were significantly higher, but better late than never.”

Beyond traditional Wall Street analysts, Madison and Wall principal Brian Wieser focused on what the spin-off means for Comcast’s scale. “In a world where scale matters more than ever before, whether for purposes of selling television advertising or selling ads across multiple platforms to provide maximum scale, unless Comcast has a vision for what it would do with the capital to build up its remaining media business or how it will cause a merger of the business with another company’s cable networks, the transaction would be dis-synergistic,” he wrote.

Wieser added, “In the present era, advertising budgets are allocated to the biggest sellers before they are allocated to smaller sellers because otherwise advertisers end up with more unintended audience duplication than they might otherwise want. In the future, scale will matter even more as marketers will increasingly prioritize the broadest-reaching digital platforms over traditional sellers of advertising.”

Distribution businesses also benefit from scale “because even now a network group is better able to secure higher pricing than they would otherwise get when they can cause a distributor to take a network consumers don’t particularly want in order to get access to networks that they do,” the expert highlighted. “Content costs are lower when they can be amortized across more media vehicles.”

Comcast noted on Wednesday that the new cable networks vehicle could become “a potential partner and acquirer of other complementary media businesses.”

Noted Wieser: “If after the company is spun-off, it is sold or otherwise pursues more M&A, there are at least new scale-based opportunities for other cable network operators (or possibly digital platforms if they might be so bold as to try this kind of large scale M&A in a new regulatory regime).”

In an Oct. 31 note, TD Cowen analyst Doug Creutz said about the idea of Comcast’s cable nets spin that it would “separate this more mature and challenged business, perhaps into a company that combines with another player’s cable networks to achieve greater scale – though such a venture may need to navigate regulatory hurdles.”

Macquarie analyst Tim Nollen also weighed in on that day. “Spinning cable networks would remove this declining revenue component that is likely weighing on the trading multiple. NBCU has been deemphasizing cable nets for some time, exiting regional sports and putting content on Peacock.”

But he also cautioned: “We question how valuable cable networks would be stand-alone, without ties to NBCU’s studio and streaming capability, and lacking advertising tie-ins.” His conclusion: “industry M&A/joint ventures appear possible.”