Comcast-NBC Universal talk worries Wall St.

Comcast shares closed Thursday down 7.2%

NEW YORK -- Wall Street on Thursday reacted with concern to late Wednesday news that cable giant Comcast Corp. is eyeing a potential acquisition of at least part of NBC Universal. Comcast Class A shares closed down 7.2% at $15.67 on Thursday.

While having its benefits, "a deal would play to investors' worst fears about Comcast's capital allocation," said Sanford C. Bernstein analyst Craig Moffett in a note to investors. "Investors have long pressed Comcast for an aggressive return of cash to shareholders. An acquisition of a major content studio, even if consummated at an attractive price, is most decidedly not what Comcast investors had in mind."

Sources said NBC Universal has prepared for various possible scenarios ahead of Vivendi’s annual month-long window, during which it can decide to exit its NBC Uni investment. If Vivendi decides to sell, GE can buy up its stake, find a new partner or set in motion an IPO next year. So, GE and NBC Uni folks are waiting for Vivendi’s decision, expected in the next few weeks, and getting ready for various scenarios.

“They have not yet made us aware of any final decisions about their future with us,” NBC Uni CEO Jeff Zucker said in a memo to staff Thursday, confirming that all options are still open. “Should they choose to exit, there are a number of possible things that could happen.”

On Tuesday, before any of the deal talk emerged, Pali Research analyst Richard Greenfield had similarly mentioned investors' fears of a big content acquisition by Comcast. "We sense investors remain concerned with the company's capital allocation strategy," he write. "Investors are clearly more concerned about the risk of Comcast making a large acquisition in the next 12 months than they are (about) Time Warner Cable, which we sense has led to a rotation from Comcast shares into TWC."

Wall Street chatter Thursday morning focused on how Comcast was unlikely to buy all of NBC Universal. Instead, talk focused on a play for slightly more than 50%, if Vivendi decides - as expected - to sell its 20% stake during an annual sales option window that starts in mid-November.

"I don't think a whole acquisition makes sense, thinking how Comcast shareholders would react," said Miller Tabak analyst David Joyce. Others also mentioned that the estimated price tag of $30 billion-$35 billion for all of NBC Uni, including a control premium, would be too high for Comcast, whose executives have in recent months signaled the company wouldn't issue new debt or stock to fund acquisitions.

The likeliest scenario, as first reported by CNBC, could see GE buy Vivendi's 20% stake and then merge it with Comcast's cable networks. Comcast seems to be using a recent Sanford C. Bernstein valuation of NBC Uni in the $21 billion-$23 billion range as it is eyeing to pay about $4 billion-$6 billion in cash and contribute its networks valued at about another $6 billion to take a 51% stake in the combined operation with a likely option to increase that holding over time.

Such a deal would be complex and present some possible regulatory hurdles. That is why sources on both sides cautioned that it may not materialize in the end.

"Arguably, their ability to shape online content distribution (via a stake in Hulu etc) and to recast windows for video on demand would be an important attribute of any deal," Moffett said about potential deal benefits for Comcast. "On the other hand, any acquisition would almost certainly come with many strings attached."

He said that any big content deal for Comcast would likely include regulatory conditions that "would make it exceptionally difficult to create value." Such conditions would likely include binding arbitration and no-blackout provisions in the case of programming disputes, he said.

"Cross-ownership of NBC broadcasting stations in Comcast's regional markets, such as Philadelphia, Chicago, and San Francisco, would also pose significant regulatory challenges," the analyst added.

GE shares finished at $15.97, down 2.7%.
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