Variety: Is Comcast’s Cable Spinoff a Buyer or a Seller?

Story from Variety:

Comcast is carving off most of its cable channels. Will its new spinoff be a hunter or prey?

The media giant last week put an upbeat spin on its move to shed what Wall Street sees as an albatross — the bulk of NBCUniversal’s cable networks, which have seen their revenue growth stymied by the cord-cutting revolution.

Now Comcast execs see a chance to push back. They may not be able to reverse the migration of onetime cable subscribers to streaming, but maybe — just maybe — they can win bigger audiences overall with a spinoff that they can add to over time. The plan, Comcast president Mike Cavanagh said, lets the company “play offense in a changing media landscape.”

This new “SpinCo,” which will take about a year to separate from the rest of NBCU, will house basic cablers MSNBC, CNBC, USA Network, Oxygen, E!, Syfy and Golf Channel. It will also include digital properties Fandango and Rotten Tomatoes, golf-course booking service GolfNow and youth-sports platform SportsEngine.

Already, Mark Lazarus, the NBCU boss who will serve as the new company’s CEO, has suggested SpinCo could look to snap up a TV station group or sports entities, according to two people familiar with his meeting with MSNBC staff. “We see a real opportunity to invest and build additional scale, and I’m excited about the growth opportunities this transition will unlock,” Lazarus said in announcing the deal.

But there’s another possible outcome: A private equity firm or strategic buyer could make a play and try to do the same thing Comcast wants to. After all, the cable networks will still bring in money for the foreseeable future, thanks to existing cable carriage contracts. The long-term outlook for linear cable is fairly bleak, but there are predictable cash flows to be mined for at least a few more years.

“Once they’re independent, we could see [private equity] firms interested in acquiring Comcast’s SpinCo with the cable networks,” says Howard Gutman, private equity strategy and coverage lead for MorganFranklin Consulting. “This is an opportunity for Comcast to look at themselves and say, ‘Some assets may not be a priority for me, but could be a priority for a new owner.’”

That’s not the future Comcast is contemplating in public. At the MSNBC meeting, Lazarus described the new company as a “well-funded start-up.” It won’t be saddled with the massive debt of rivals like Warner Bros. Discovery and Paramount Global. According to Comcast, SpinCo will have a “well-capitalized balance sheet with strong credit metrics.”

Because Comcast is structuring SpinCo as a tax-free spinoff, there’s typically a two-year waiting period before it engages in any strategic M&A to avoid incurring taxes on the transaction, Morgan Stanley analyst Ben Swinburne wrote in a research note last week. However, he added, “we believe there are scenarios where industry consolidation including SpinCo could happen earlier.”

Revenue in NBCU’s media segment has stalled amid declines at its linear networks and growth at Peacock.

The economics of cable are in seemingly irrevocable decline. Warner Bros Discovery in August unveiled an enormous $9.1 billion write-down of its TV assets, citing business headwinds as well as the projected loss of its lucrative agreement with the NBA to air games on its cable networks. A day later, Paramount followed suit, revealing a $5.98 billion impairment charge for its cable TV biz ahead of its acquisition by Skydance Media.

But Comcast has managed to stay in better shape. Since 2015, it has unsentimentally shut down eight networks (G4, Olympic Channel, NBCSN, Chiller, Universal HD, Esquire Network, Cloo and Universal Sports). “Comcast has been more aggressive than any other media company in shutting down basic cable networks over the years,” says Scott Robson, senior research analyst at S&P Global Market Intelligence. It’s not surprising the company is spinning off the cable networks, which “are more vulnerable for future declines than the broadcast networks due to the contraction of the pay-TV universe,” he says.

SpinCo is also a defensive move, aimed at keeping the NBC broadcast network and the Peacock streaming hub apart from the downward-sloping cable TV business. The “new” NBCU will comprise NBC and stations, Peacock, Bravo, NBC News Group, NBC Sports, Telemundo, the Universal theme parks and resorts, and NBCU’s film and television studios. Notably, reality-TV powerhouse Bravo is not a passenger on the SpinCo boat, as NBCU sees it as essential to the health of Peacock, where favorites like the “Real Housewives” and “Below Deck” franchises fuel a considerable amount of the streamer’s viewership.

As Cavanagh indicated on Comcast’s Oct. 31 earnings call, offloading the cable nets is designed to boost the core company’s overall growth profile (and, by extension, its market valuation). The cable spinoff “should be positive for Comcast shareholders,” Raymond James analyst Frank Louthan wrote in a research note last week. SpinCo’s relative valuation “will be lower than where the parent is currently trading, even though it is likely a cash cow for multiple years.”

Separating from the NBCU mothership will introduce new challenges. SpinCo is angling to get better scale through potential rollups. However, as Louthan notes, the cable group will experience “dis-synergies” in the near term. As a stand-alone business, it will have more limited pricing power in asking for bump-ups in carriage fees. There are also questions about, for example, how MSNBC will disconnect from NBC News and what will happen to NBCU’s integrated ad-sales team.

Whether SpinCo ends up buying other distressed media assets or opting to sell the cable networks (as a whole or individually), Comcast’s formation of a separate cable-network company signals more transformative M&A for the roiled pay-TV sector.

After the Paramount deal with Skydance, “Comcast knows that there are people and groups that are attracted to these kinds of entertainment assets,” says Gutman. “For the broader media space, it tells you that these companies will begin setting themselves up for consolidation over the next few years.”