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You complete me

16 December 2009 By Rob Cox, Richard Beales

Comcast boss Brian Roberts said buying control of NBC Universal, General Electric’s media business, made him and his cable group “strategically complete.” This was code to his shareholders, who have worried about him building an empire in the content business ever since he tried to buy Walt Disney, that he’s done shopping.

But to fully complete the deal, Comcast needs to buy the 49 percent of the broadcaster and Hollywood film studio still in GE’s hands. And if NBC’s core cable businesses continue growing, the conglomerate’s remaining stake could be worth some $20 billion by the time Roberts can buy it.

That’s a big chunk of change for Comcast shareholders. But here’s where Roberts and Comcast’s financial engineers may deserve a quiet round of applause. The deal looks to have been structured in a way that should, if Comcast is willing to be patient and NBC performs, pay for itself over time.

First, it’s worth trying to put a future value on GE’s stake. The deal with Comcast pegged GE’s stake as worth $13.8 billion today. Under the terms of the agreement, GE can compel Comcast to buy out half of its remaining interest three-and-a-half-years after closing, which should take place about a year from now. If GE exercises that right, Comcast can oblige GE to sell it the whole stake.

Assume that’s what happens. Meanwhile, NBC’s operating cash flow grows at 12.5 percent annually to $4.5 billion in mid-2014 – it has grown faster in recent years. Now, say rivals like Disney trade at 10 times operating cash flow by that time, and that implies a fair market value of $45 billion for NBC.

Then Comcast has to pay a 20 percent premium to the fair market value – but in a private equity-like profit share, also gets to knock off half the gains since the deal, which valued NBC at $28.2 billion. Do the math and allow for cash flow paying down some of NBC’s $9 billion of debt along the way, and NBC ends up valued just shy of $40 billion – and GE’s stake at just under $20 billion. (See the Reuters Breakingviews calculator.)

That’s if Comcast pays for it. But there’s another option. Suppose instead of paying down debt NBC keeps its ratio of debt to operating cash flow constant. Then by mid-2014, it could have added an extra $4 billion-plus of debt as well as bringing in some $6 billion of free cash.

It’s no coincidence that adds up to some $10 billion – about what buying half GE’s stake would cost. One possible outcome would be for NBC, rather than Comcast, to fund the purchase, and then repeat the process over another three-and-a-half years to finance the purchase of GE’s remaining stake – a timeline the Comcast-GE deal contemplates.

That would be a neat trick, and underscores the savvy deal Comcast has struck. It protects the company against having to pay through the nose for GE’s stake if NBC performs really well. It’s not armor-plated protection – Comcast could still end up out of pocket if, for instance, NBC doesn’t deliver the expected levels of cash flow, or if market multiples are excessive when 2014 comes around. But at least Roberts hasn’t left his shareholders completely exposed.


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