Comcast shares posted modest gains Wednesday after the company announced its plan to spin off all of NBCUniversal’s cable networks, except Bravo, into a separate publicly traded entity.
Investors’ initial shrug at the proposed transaction underscores the uncertainty of the maneuver.
The hope for Comcast is that by shedding declining assets, the company’s shares will rise. Cable networks are still profitable, but they’re hemorrhaging subscribers and revenue every year as Americans cancel traditional pay TV for streaming services. That may be an anchor on Comcast’s shares. Wall Street typically doesn’t like assets with slumping revenue and profit.
Still, there’s plenty of uncertainty around the spinoff. It’s unclear if Comcast investors will care that much. The NBCUniversal cable networks are relatively small assets, generating about $7 billion in revenue over the 12 months ended Sept. 30, according to a Comcast news release. For comparison, the rest of Comcast took in about $116 billion in revenue.
It’s also unclear if the spun-off company will flourish as a publicly traded entity. If Comcast is shedding cable networks because Wall Street doesn’t like them, why would shareholders want a company that consists of declining assets?
There’s a reason Disney decided not to spin its cable assets. The company considered it and ultimately decided the earnings lost from spinning profitable networks would trump any potential multiple expansion from a spin. Still, Disney’s cable networks, including FX and Disney Channel, are more integrated with its streaming platforms than NBCUniversal’s cable networks are with Peacock, the company’s subscription streaming service.
The new company, temporarily called “SpinCo,” will generate cash and could pay a healthy dividend to shareholders looking to invest in declining cash assets. But that’s usually more of a private equity strategy. That may ultimately be where cable networks are heading — to private ownership willing to harvest them for cash.
It’s also possible some of the cable networks could find new footing outside of NBCUniversal’s ownership. SpinCo’s CEO-to-be, Mark Lazarus, may be able to strike new licensing agreements with other streaming services now that the cable assets aren’t purely a marketing and content distribution tool for Peacock.
Profits for SpinCo can be reinvested into businesses, including CNBC and MSNBC, instead of being diverted toward Peacock and NBCUniversal’s theme parks.
Another possible path for the spinoff is as a rollup entity for other cable networks. Comcast is purposefully structuring SpinCo with low debt. Perhaps the company could take on some of Warner Bros. Discovery’s debt and its cable networks. The same could be said for Paramount Global.
The bigger motivation
With so much unknown, Comcast probably isn’t doing this because it’s sure the spin will be a slam dunk for investors. Instead, Comcast’s motivations may be a signal to the media industry that it’s time to enter a new phase.
“There’s simply not enough revenue in these businesses to cover the costs anymore,” Kevin Mayer, co-CEO of Candle Media and a former Disney executive, said in an interview. “There has to be consolidation now. It’s Econ 101.”
That’s a sentiment Warner Bros. Discovery Chief Executive Officer David Zaslav addressed during his company’s earnings call earlier this month.
“This is an industry that really needs to meaningfully consolidate,” Zaslav said. “If the best content is going to win, there needs to be some consolidation in order to have these businesses be stronger and to have a better consumer experience.”
In other words, even if SpinCo flounders as a publicly traded company and Comcast doesn’t get any multiple expansion, simply signaling to the media world that it’s time for a change may be worthwhile. In the long run, perhaps trying something is better than trying nothing at all.
One more thing: If Comcast wants to attempt a large merger in a Donald Trump administration, such as buying U.S. cable company Character or another telecommunications company, shedding MSNBC may not be a bad idea. The last time Trump was president, his Department of Justice blocked AT&T’s acquisition of Time Warner — reportedly because Trump was not a fan of CNN.
