Cindy Ord
Comcast (NASDAQ:CMCSA) is composed of two basic parts: broadband/cable-wire utility, producer of content. It’s the latter, of course, that possesses the most optionality in terms of hit filmed-entertainment slates and catalysts via merger/acquisition activity: nothing excites Wall Street more than a Hollywood purchase. In the case of Comcast, the utility/dividend side of the story is certainly a bit more laidback than the glamour of buying an asset based in Tinseltown or the excitement of a box-office blockbuster.
I’ve been thinking about Comcast’s content side in recent weeks as reports have come out about the company’s desire to do something in the M/A space, whether it would have been with a video-gaming business or even Disney’s (DIS) Hulu. In this article, I will briefly consider Comcast and the current context of consolidation as it applies to the media concern, with the main focus being on Hulu and the company’s eventual transaction with that asset (set to take place in 2024); I will also mention I am long the stock and believe, as a few recent SA pieces have stated, that it is a solid long-term idea. (Here’s a bearish viewpoint for balance.)
Comcast: Peacock Vs. Hulu
Let me first consider Hulu. CNBC published an article earlier in the month about the service and the 2024 planned sale of Comcast’s stake to Disney, which would then make the Mouse full owner. The main question is: Would it be in both parties’ interest to sell Hulu to Comcast?
It’s quite a suggestion to ponder. For Disney, the advantage might be that it could pour all its resources into D+ and not worry about expanding Hulu. Plus, it might be simpler for the consumer to focus on a bundle with just two components – D+ and sports streamer E+. The company could obviously lower the price and make it more economically attractive during an inflationary period.
Disney, however, probably enjoys the flexibility Hulu offers – it’s another platform differentiated from D+’s family-centered programming and on which all kinds of movies/series can be placed.
Hulu has over 40 million subscribers, while Peacock currently sports 13 million users who pay for the service among the total 28 million active accounts.
Peacock obviously has a lot of room for growth, which makes the question of Comcast taking Hulu off Disney’s corporate hands even more interesting. Could, for example, Hulu help Peacock grow? Could Hulu help defend Comcast’s linear system in the same way Peacock does now – i.e., by offering different tiers with one of them being free and ready to activate for cable subscribers?
The problem here is that Disney is obligated to pay at least $9 billion in 2024 to Comcast for the latter’s Hulu stake (this is because the minimum worth of the service is agreed to be $27.5 billion, and Comcast owns a third; there is another provision to the agreement that states the minimum payment to Comcast would be lowered to $5.8 billion, depending on Comcast’s capital funding activities, as mentioned in this press release). Both Peacock and Hulu are similar services – subscription-video-on-demand backed by libraries and near day-and-date movie offerings, either with/without advertising as a way of mitigating monthly cost. Peacock could perhaps indeed synergize with Hulu – but what would be the opportunity cost?
Comcast’s Optionality
Yes, Comcast has options. And Comcast has a lot of platforms/services.
Comcast also has a lot of debt, over $90 billion.
Would Comcast rather look at its options with Hulu or with somewhere between $6 billion and $9 billion in its treasury?
Owning Hulu could mean another service, as I’ve said, to offer to its members; or, it could become absorbed into Peacock. Perhaps it could even be rebranded into something else – some have suggested Peacock itself should be rebranded into something like NBCUniversal+.
But then Comcast would be in the position of buying an asset that benefits others who already have content deals locked in place. Having the cash would most likely be a better fit.
Besides debt payments, Comcast could use the cash influx in several ways (which I’ll cover very briefly):
- The company could make an acquisition.
- The company could generate more content.
- Management might use the windfall to expand Peacock.
- Comcast might think about starting another streaming brand.
- It could go toward sports rights.
- Finally: the usual suspects: buyback, dividends.
Acquisition: Comcast could find a smaller-cap acquisition to pursue, whether it be a production company or a studio.
If Comcast were getting the money sooner (or, alternatively, if it made a deal with Disney to sell out sooner), then everyone knows what my suggestion would be: offer Jon Feltheimer over at Lions Gate Entertainment (LGF.A) (LGF.B) a premium to acquire that company’s studio system plus streamer Starz (I am long LGF on the consolidation thesis). Starz might be sold off in a couple months, so this is more of a hypothetical, but it is instructive to consider that a media company at Lions Gate’s market cap would be a more ideal use of cash instead of grabbing Hulu. Comcast would be getting IP to exploit, a large library of content, and a streamer that could co-exist with Peacock.
There surely will be other options in 2024 for Comcast to consider if Lions Gate is out of the picture, but any acquisition should be either platform-based or, more likely, content-based. As an example, Universal already has a solid relationship with Blumhouse Productions and Jason Blum – that would be a solid buyout target at which to look.
More content: Several billion dollars can buy/produce a lot of filmed entertainment.
Not all of it should go to streaming. In fact, the company could bolster its theatrical slate to take advantage of the recovering multiplex industry, which should grow over the next several years beyond the 2024 payout date. It also could incubate other ideas on broadcast/cable. Such incubated shows could then eventually migrate over to the streaming side, as too would the theatrical movies, some of which might even go day/date.
A focus on Peacock: Management might decide that it should go all-in on Peacock and let the movie slate take care of itself with other NBCUni-related cash flow and co-financing arrangements. Considering that Netflix’s (NFLX) recent subscriber-growth issues have placed increased attention on advertising as a way of expanding average revenues per viewer, and that Disney’s recent hook-up with The Trade Desk (TTD) has further identified advertising as a hedge against premium streaming, Peacock, which arguably is significantly tied to its advertising tiers, could use more content for itself (and upgrades to its platform experience) as a way of leaning into this trend.
Another streaming brand? It’s possible. Comcast, as a way of continuing to build out hedges against its linear ecosystem and decline of video-customer relationships, could easily decide that another over-the-top service is necessary in its portfolio. Imagine if the cable giant wanted to go head-to-head with Disney in the family department and create its own dedicated service geared toward that demographic – Comcast is riding high with its animated Minions movie, it owns DreamWorks Animation, and expansion of this category of intellectual property would be best served by a new platform, of which seed money from a Hulu-stake sale would come in handy.
Of course, the sports industry is another area in which it competes with broadcasters and Disney’s ESPN. NBCUni is big on the Olympics, and other sports-related programming could add value to the overall ecosystem. Given the deal with World Wrestling Entertainment (WWE) on Peacock, and Apple’s (AAPL) own investment in this sector, one can see how important sports programming is to streaming concerns.
Aside from these bullet points is the traditional share buyback, etc. For a stock that is known mostly for its dividend payments, shareholder-friendly return-of-capital initiatives are certainly reasonable; however, in Comcast’s case, for the company’s stock to break out of its range and into new growth modes, investing in the business is probably the preferrable route.
While Hulu would be an extremely interesting asset for Comcast to have, recall that the origin story (from way back in 2007) for the SVOD concern centered in part on creating a nascent marketplace for content, one that could counteract the power of the rising Netflix. That’s why Disney, NBCUni, and others joined forces to make Hulu happen; such reasoning no longer exists. Comcast placing the service within its own linear ecosystem would add a certain dimension of value, and with ad-supported streaming now challenging Netflix’s old approach of no-ads-ever, Hulu would fit right in with the cable giant’s legacy set-top-box platform. Still, cash is king for Comcast; therefore, leaving Hulu with Disney would most likely offer a better outcome.
Conclusion/Stock
Hulu would probably be better off in Disney’s corporate hands, at least as far as Comcast is concerned (the other side for Disney is also an interesting case, a topic I may cover at another time). Focusing on growing Peacock would seem to be in the cable giant’s best interest, and new cash could help toward that goal, especially if the idea for helping Peacock is to help out the film slate.
The stock, which I own, is a long-term holding. At the time of this writing, shares were trading around the $40 area. It’s a long way off from the roughly $60 52-week high.
The yield is currently 2.6%. While it would be nice to get this media company above 3% (and patience may be rewarding on that count, given the bear market), it is not a bad yield relatively, especially for those who watch the stock closely and are used to seeing reported yields of under 2%. I’m guessing the market won’t let this one go too far below 3%, so there is probably some safety with this dividend-based equity.
SA considers the valuation average right now, but on some individual metrics such as forward P/E (non-GAAP) and P/forward-cash-flow, it is more highly rated.
With Netflix potentially signaling an inflection point in the streaming wars where advertising may become more important going forward, one could argue Comcast is in a good position. NBCUni will be a hedge for the linear side of the business, and in the next few years, I expect transformative acquisitions to come from CEO Brian Roberts; I would also hope for the company to identify any appreciated assets it could sell for purposes of exposure to deleveraging.
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