Is Comcast A Candidate For A Private Equity Buyout?

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One of the ways I keep up on all things media is through a Google email alert on Providence Equity, which is the major media focused private equity firm. An alert I received yesterday contained a link to an article discussing a note that Bernstein put out last week mentioning Comcast (CMCSA/CMCSK) as a perfect candidate for a private equity led buyout. The purpose of the Bernstein note was not to suggest that Comcast would go private but rather to note that if the numbers worked so great for private equity then the stock was probably significantly undervalued. If there is anything regular readers of Street Insight know it is that I am bullish on Comcast so this I find angle on the bull case especially interesting.
This is really just an intellectual exercise as Comcast has an $80 billion market cap and about $30 billion in debt. It seems like private equity can finance anything these days but a deal of that size, before considering any premium, seems impossible. Then again, with all the liquidity floating around it could probably be financed. My spread sheet has Comcast generating $12.1 billion in EBITDA this year. I’ve seen plenty of private equity deals with debt to EBITDA at 8-9 times. Bernstein suggested banks would lend at 8.5 times, which works out at $102 billion in debt. Against Comcast’s current enterprise value of $110 billion that would leave the need for just $8 billion in equity before any premium….

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Where Are All The New Cable and Satellite TV Customers Coming From?

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One oddity in the current multichannel television landscape is that all the major players are gaining subscribers despite what most observers would consider a pretty intense competitive environment in a mature industry. My rough calculations suggest that DirecTV and Echostar’s Dish Network will add about 2 million subs combined this year. Verizon and AT&T could add another half million and the major cable players could add a few hundred thousand.
With about 90% of the 110 million US households already having multichannel TV, it is hard to see where 2.5 million new subscribers are coming from each year. I discussed this with Spencer Wang, lead media analyst at Bear Stearns. Among the possibilities we came up with are a gradual increase in multichannel penetration, new household formation, households taking both satellite and cable, more subscriptions from bars and restaurants, or alternative venues like supermarkets or airplanes….

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Virgin Media Shareholder Speaks Out

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In an SEC filing yesterday, Franklin Mutual Advisers indicated that it is seeking talks with management and other shareholders of Virgin Media (VMED) in light of VMED’s recently released first quarter results. Franklin owns 9.8% of VMED but has only modestly added to its position recently according to the filing. Here is the key passage from the 13D:
“FMA purchased the Common Stock in the ordinary course of business for its advisory clients for the purpose of investment. In view of the results for the first quarter 2007 announced by the Issuer on May 9, 2007, FMA may initiate discussions with the Issuer regarding, among other things, the Issuer’s strategic direction, corporate governance and management, and to communicate from time to time with the Issuer’s executive management and board of directors and with other holders of the Common Stock regarding such matters.”
I sold my position in VMED last year because I felt that the company would have trouble producing any meaningful growth in revenue and operating cash flow due to the intense competitive environment in the UK for the cable, telephone, high speed internet, and wireless telephone. Since my sale the competitive environment has worsened….

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Media Madness for May 14, 2007

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Lots of Madness in Mid-May following the completion of quarterly earnings season:
• The Wall Street Journal speculates that a merger between the NBC Universal division of General Electric (GE) and Yahoo (YHOO) could be structured to help all concerned parties. GE would obtain a premium valuation for NBC and gain strategic benefits in selling advertising. YHOO would gain scale and content and get a premium on its stock price allowing the under siege management team to save face. The Journal also speculated that Comcast (CMCSA/CMCSK) could be interested in buying NBC Universal. I see both of these possibilities as highly unlikely. Comcast shares look a little lower this morning, possibly on this rumor. Comcast acted very poorly following its aborted attempt to takeover Disney (DIS) a few years ago because investors thought is signaled lack of confidence in the cable business. A similar reaction would occur in a major way today. Comcast repeatedly indicate it is not interested in a DIS type deal. I think we should believe them.
• The Journal is also reporting that CBS (CBS) is scrapping its internet strategy that was designed to drive traffic to CBS.com to watch TV shows. CBS will now make its content available widely over the web while selling the ads that will appear in the shows and clips. This is not new news to media analysts who have generally applauded CBS new internet strategy. I think it is a good move as well. Content has great value and making it as widely available as possible is the best way to monetize it. Two risks seem obvious. First, you could devalue the content by making it too easily available at what will be hugely discounted advertising prices to the TV network. Second, CBS will probably encounter resistance to its plan from major internet sites that won’t like CBS keeping the overwhelming share of the ad revenue. I think these are risks worth taking. However, I still CBS shares are going to have problems due to severely deteriorating ratings for its primetime lineup, especially key shows on Thursday nights….

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Solid Results for Viacom

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Viacom (VIA) reported slightly better than expected 1Q07 results. Trends did not differ greatly from analyst expectations but the risk was to the downside so I think the results will be greeted favorably by investors and VIA shares will buck the sell the news reactions seen following good results from Disney (DIS) and News Corp..
VIA reported adjusted EPS of 34 cents against a consensus estimate of 32 cents. Revenues of $.275 billion exceeded the consensus estimate of $2.55 billion driven mostly by upside in the Entertainment segment. Revenues rose 16% vs. a year ago but heavy spending at the company’s cable networks and movie studio pushed operating income down 20%.
Media Networks, which includes all of VIA’s cable networks such as MTV and Nickelodeon, reported 10% revenue growth and 6% operating income growth. Affiliate fees grew by 14%, advertising grew by 10%, and other revenues were up 2%. Affiliate fee growth was boosted by foreign currency and acquisitions as organic growth was just 4% abroad and 10% in the US. The closely watched domestic advertising showed growth of 8%, slightly ahead of analyst estimates. Management would not breakdown this figure between digital and TV revenues but did note that digital revenues were running storng enough that the previous goal of $500 million in 2007 was now a “commitment.” I think this probably means that US TV growth was low single digits in the first quarter. Given ongoing weak ratings at VIA’s big cable networks, the biggest risk to the shares is that US TV growth does not accelerate…..

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Another Good Quarter For Disney

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Disney (DIS) reported very good 2Q07 results driven by strong margin performance across all five operating segments. Better profitability allowed EPS to easily exceed consensus estimates coming in at 44 cents, up 19%, vs. expectations of 38 cents, up 3%. Revenues fell very slightly short of estimates at $8.07 billion, $60 million short of estimates. The revenue shortfall was concentrated in the Broadcasting and Studio Entertainment segments but was offset by better than expected revenue for Theme Parks and Consumer Products.
Despite the big beat on EPS, DIS shares immediately traded about 1.5-2% lower following the report. I suspect it is just a sell the news reaction as I really don’t see any problems at all unless you consider a $60 million revenue miss on over $8 billion in revenues a big deal. I don’t, especially when operating income exceed estimates in four of five segments and was $200-300 million ahead of the street.
The upcoming 3Q represents DIS’s toughest comparison of the year. Presently, EPS are projected to be flat at 53 cents. For the first six months adjusted EPS are up 31%, so earnings momentum looks set to slack. The major issue for 3Q is that last year DIS released The Chronicles of Narnia DVD which sold extremely well. No comparable release exists this year. I’d guess that alone could cost the company in excess of $100 million in operating profits over the balance of the fiscal year, with most of the shortfall coming in 3Q. On a base of $2 billion in operating income this represents a serious challenge to overall corporate growth.
Offsetting the tough Studio comparison is the fact that for two consecutive quarters DIS’s margins have expanded sharply. If overall corporate profitability has taken a full step higher then DIS earnings power is greater than currently anticipated. While some of the margin expansion can surely be linked to outstanding content performance, I think there is some permanent flow through, particularly at the Studio and Theme Parks. Strong scatter pricing at ABC and a recent ratings surge should also boost 3Q….

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Taking Profits on Japan

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Northlake clients have owned a position in Japan via the iShares MSCI Japan Index (EWJ) for over two years. Until yesterday that is. At the open, I sold the entire position. My opinion that Japan is exiting a multi-decade economic and stock market slump has not changed. Rather, with the market having been so strong, seasonals turning negative, and most client accounts being fully invested, I felt it was prudent to raise some cash.
With Disney (DIS) pending after the close, all of the individual stocks held by Northlake clients have reported outstanding quarterly earnings and guidance was either increased or a bias for higher guidance was implied (see my recent coverage of earnings calls for AAPL, CETV, NIHD, RG, and RGC). With increased confidence in the outlook for these stocks and their ability to bounce back from any market related weakness, I feel that clients are in good shape holding these positions even as I desire to raise cash. Away from individual stocks, other client holdings were EWJ and the money dedicated to Northlake’s Market Cap and Style models. The allocation toward the models is permanent as part of a relative performance strategy, so that left me with Japan as a possible sale….

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Disney: Slowing Growth, High Expectations Raise The Bar

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Margin expansion should propel Disney (DIS) to another quarter of greater than 10% growth in operating income when it reports 2Q07 results after the close on Tuesday. Revenue and EPS growth are only projected to grow in the low single digits due to tough comparisons. DIS has produced significant positive surprises in each of the last four quarters and estimates have been rising slightly so the expectation bar is high. With 3Q also facing a tough comp and slower growth than in recent quarters, DIS probably needs to report a positive surprise and indicate 3Q is shaping up well for the shares to move higher. An as expected quarter could lead to a sell the news reaction.
DIS is being very tightly and adeptly managed and has great momentum in its content divisions. I think the company will produce a quarter that satisfies investors. I am long and expect to remain long following the quarter looking for an exit closer to the $40 level.
Current consensus estimates call for EPS of 38 cents on revenues of $8.13 billion. A year ago EPS was 37 cents on revenues of $8.02 billion so growth is expected be just 1-2% in the headline numbers. Margin expansion at almost all division will produce better operating income growth which is the key measurement for investors….

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Warner Music: Might Be Stabilizing But No Upside

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Warner Music Group (WMG) reported slightly better than expected 2Q07 results with revenues of $784 million and EBITDA of $96 million both soundly beating analyst estimates. Despite the big beat on these metrics, the source of the upside was not material relative to the challenges faced by the music industry. Upside in publishing and foreign exchange looks like it accounted for most of the variation as trends in recorded music were as poor as expected.
I think investors might be able to takeaway that for the time being things are not getting worse at WMG. When added to the cyclical benefit of a backend loaded release schedule, the worst may be over for the stock for the next several quarters. However, barring a dramatic deceleration in the rate of CD sales decline or an acceleration in digital sales, I don’t think much upside exists….

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Spiderman 3 Spins A Massive Web

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Spiderman 3 blew away the all-time opening weekend box office brining in $148 million in domestic box office. The old record was set last year by Pirates of the Caribbean: Dead Man’s Chest which grossed $135.6 million. Look for Pirates of the Caribbean: At World’s End to be the new record holder when it opens this coming Memorial Day record. And that little film Shrek The Third due a week from Friday seems on target to open north of $100 million. So much for the death of the theatre business.
Spiderman has also opened in many overseas markets where it similar opening day and opening weekend records. The film has already grossed $375 million globally placing it in 96Th place on the all-time list. Spiderman is ahead of Batman Returns and Beauty and the Beast and just short of last winter’s blockbuster, Happy feet, which grossed $384 million globally for its entire run.
We won’t know how high Spiderman 3 is headed until we see mid-week and second weekend box office but with little competition next weekend, the numbers will likely remain huge. A 60% decline would still leave Spiderman 3 with $60 million on its second weekend, which would be good enough for 35th place on the all-time opening weekend list. The biggest ever second weekend belongs to Shrek 2 at $72 million just ahead of $71 million for the original Spiderman. Pirates 2 is 3rd with $62 million on its second weekend a year ago.
My own estimate for Spiderman was $130 million, low but good enough to allow me to reward myself with the closest guess in last week’s contest.
Here are a few other interesting facts on the weekend box office. Spiderman 3’s gross of $148 million exceeded the entire comparable weekend from a year ago where all the films in release brought in just $110 million with Mission:Impossible 3 leading the way in its opening weekend at $48 million. The total box office tally for this weekend is $181 million with the $71 million gain moving the quarterly box office from a 5.3% decline to a 3.5% gain. The gain should build considerably this coming weekend when the comparable period a year ago saw just $99 million in box office as the summer’s biggest flop, Poseidon, opened in second place to just $22 million, $5 million behind MI3: Spiderman 3 is likely to beat to beat the combined gross of those two films by at least $10 million next weekend and its weekday grosses will blow away MI3’s from a year ago. There are two new films in wide release this coming weekend that could find moderate interest including 28 Weeks Later, the sequel to the cult hit 28 Days Later, and Georgia Rule, a chick flick with a strong cast that might be good counter programming to the second weekend of Spiderman 3…..

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