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How Comcast 'Stole' NBCUniversal From General Electric

http://www.thestreet.com/_nasdaq/story/11840261/1/how-comcast-stole-nbcuniversal-from-general-electric.html?&cm_ven=NASDAQ&cm_cat=FREE&cm_ite=NA

Antoine Gara

02/13/13 - 10:49 AM EST

NEW YORK (TheStreet) -- Comcast (CMCSA) surprised investors with a deal to buy a remaining 49% stake in NBCUniversal, a joint venture with General Electric (GE) first announced in 2009.

While Tuesday's $16.7 billion acquisition is seen as benefiting both Comcast and General Electric and has helped push shares in both companies to new five-year highs, there is a clear winner.

Put simply, Comcast got a steal in buying up NBCUniversal's broadcast, cable TV, movie studio and theme park assets for a total value of just less than $40 billion.

With expectations that full ownership of NBCUniversal will immediately add to Comcast's earnings as rising free cash flow simultaneously helps to pay back acquisition financing, the transaction can be seen as one of the biggest M&A coups since the financial crisis.

"Comcast is paying essentially the equivalent to what it paid for half of the asset two years ago, despite 24 months of [operational] turnaround," Jessica Reif Cohen, an analyst at Bank of America Merrill Lynch, wrote in a note to clients. "We believe the asset is worth more, and there is clearly value in owning 100% of an improving business," added Cohen, who characterized Comcast's acquisition as a "steal."

To understand why Comcast and its chairman and CEO, Brian Roberts, got a better deal, simply follow the money. Meanwhile, the benefits of NBCUniversal to Comcast may track improvements to the overall economy and more specific turnaround strategies implemented since the joint venture was first launched.

In the two separate transactions to form and then take full control of the NBCUniversal joint venture, Comcast is shelling out a grand total of about $18.5 billion in cash to General Electric. For its part, GE is poised to receive only about $12.7 billion in immediate net cash, given a $5.8 billion payment made to Vivendi in 2009 for the company's French media conglomerate's 20% stake in NBCUniversal.

To get to NBCUniversal's total valuation on about $39.1 billion, Comcast didn't just put up cash. It also threw in a mélange of assets and financial commitments that softened the price tag.

For instance, when announcing the first leg of the NBCUniversal deal in 2009, Comcast's total $13.75 billion payment to General Electric consisted mostly of cable assets it contributed to the venture. In that part of the deal, Comcast forked over just $6.5 billion in cash and another $7.25 billion in assets -- cable channels like E!, Versus and the Golf Channel, in addition to regional sports networks -- for a controlling 51% stake in NBCUniversal.

Given GE's payment to Vivendi in the first leg of the deal, the industrial conglomerate received less than $1 billion in net cash for ceding the reins to NBCUniversal to Comcast.

In Tuesday's deal for the remaining 49% stake, Comcast will fork over a further $12 billion in cash to GE, and $4 billion in what's assumed to be low-cost Comcast debt and about $1 billion in the company's preferred shares. Still, Comcast's actual cash payment may be far lower.

The "cost to Comcast shareholders is effectively $14.4 billion," Guggenheim Securities analyst Shing Yin wrote in a note that highlights $4.6 billion will be cash from NBCU's own balance sheet. "In theory, Comcast shareholders have claims to only 51% of this cash, so the cost to shareholders could be viewed as being $2.3 billion lower than the headline $16.7 billion number."

Citigroup analysts note that the second part of the buy-in hinged on an agreement to value the remaining 49% stake in NBCUniversal based on market multiples ascribed to competitors. They characterized Tuesday's deal as a 'fair' price.

In a separate Tuesday deal, GE will receive a further $1.4 billion in cash from Comcast for control of NBCU occupied floors in the company's 30 Rockefeller Center headquarters, and the headquarters of CNBC in New Jersey.

Still, if Comcast can be characterized as a victor in the NBCUniversal deal that doesn't necessarily mean GE is playing the role of a sucker.

In fact, the deal as it stands is likely to be a win for both companies given their respective needs and corporate strategies.

For Comcast, Cohen of Bank of America predicts that owning NBCUniversal in full will add about 11% to the company's overall earnings per share this year and a similar amount in coming years. The key, Cohen notes, is that NBCUniversal's operating performance is now definitively on the upswing.

In 2012, NBCUniversal revenue rose nearly 13% to over $23 billion in annual sales, while operating cash flow grew over 9% to $4.1 billion. Those figures, in addition to low cost financing arrangements and potential divestitures by Comcast of its minority interest in A&E and a sale of spectrum to Verizon (VZ) for about $2.3 billion may help to keep the company's balance sheet in check, according to Cohen.

General Electric shareholders are unlikely to complain about Tuesday's deal or the full disposal of its long-held media empire, given the already unwieldy size and scope of the conglomerate.

In fact, the first leg of the NBCUniveral deal came at a time when GE was selling assets in order to stabilize its financial services arm and repay billions in crisis-time government loans. The second leg of the NBCU stake sale may reflect the company's newfound ability to return growing amounts of capital to shareholders, as crisis-time woes fade.

On Tuesday, GE said the stake sale and a divestiture of real estate assets will cause accounting gains of $1 billion for the parent company and $900 million for GE Capital the industrial conglomerate's financial services arm. In total GE is selling $18.1 billion in assets, when real estate properties are included.

"This transaction allows us to significantly increase the cash we plan to return to shareholders in 2013, to approximately $18 billion, and to continue to invest in our industrial business," Jeff Immelt, GE Chairman and CEO, said in a statement. GE is now authorized to repurchase $35 billion in stock, with plans to buy back $10 billion in shares this year.

"We think the news affirms that the enormous self-help potential at GE is starting to be realized, and this should drive share price outperformance," Julian Mitchell, an analyst with Credit Suisse wrote of Tuesday's deal.

"GE has substantial non-core assets, and it is encouraging to see these being divested at a decent price," Mitchell added, while stressing the disposal oif NBCUniversal may not be dilutive to GE's earnings given the company's expected increase in capital returns.

Simply put, buying NBCUniversal may commit Comcast to a new phase of growth and expansion. In contrast, General Electric is selling down assets and paring its expansive operations. While shareholders in both companies may win, Comcast investors may have gotten the upper hand.

On news of the deal, Comcast shares rose over 6% to $41.40 in early Wednesday trading, a new record high for the company. General Electric shares gained over 3% to $23.34, reaching a five-year high in after-hours trading.