Wall Street sizes up Comcast/NBCU deal

One analyst calls the move 'strategically questionable'

NEW YORK -- Wall Street on Friday continued to ponder the structure and weigh benefits and risks of the deal that will give cable giant Comcast a 51% stake in NBC Universal, with several analysts highlighting their concerns.

Credit Suisse analyst Spencer Wang lowered his rating on Comcast shares from "outperform" to "neutral." "The deal is financially sound, and the structure elegant for Comcast," he said. "Timing could also be fortuitous for Comcast, as NBCU could be nearing the bottom of both the advertising and creative cycle" when the deal closes.

But then came his big "but." Wrote Wang: "However, we still view the transaction as strategically questionable as our work finds limited synergies from vertical integration." He also expressed concern about a lengthy regulatory review, expected to take 9-12 months, integration process. "This could consume management resources, place operational strain on the organization, and increase the earnings risk profile," Wang argued.

Comcast shares rose Thursday after the deal announcement as Comcast raised its dividend and committed to more stock buybacks. But Wang said that "some investors have been hoping Comcast would more meaningfully accelerate the return of capital to shareholders," which could further drive some investors to rival cable stocks in the near-term.

"Our analysis of past major media mergers supports this notion as the share prices of acquiring media companies have tended to underperform the broader market between deal announcement and deal close," Wang concluded.

Analysts at Sanford C. Bernstein in a Friday report also cited the regulatory risk as a key factor that will likely "constrain upside for the next year" in Comcast shares. While they see "significantly less potential for appreciation than prior to announcement of the transaction," they continue to rate the stock "outperform" with a target price of $18, citing a low valuation and "the continued attractiveness of its core cable distribution business."

Otherwise, the Bernstein team focused on some curious elements of the deal. "The deal structure leaves a $610 million equity 'gap' between what Comcast is contributing to the deal and what it 'should' be contributing," they said. "As revealed in a subsequent Comcast meeting with the sell-side, the reason for this gap is that Comcast is, curiously, being credited with a portion of the cash flows of NBCU for a year before the deal closes -- a period in which Comcast will own none of the equity. In effect, GE is paying itself, and is crediting that payment towards Comcast's purchase price."

Adjusted for this "idiosyncrasy," the true value of NBC Universal in the deal is $28.8 billion, rather than the advertised headline $30 billion valuation, the Bernstein team said.

A business issue that concerned the Bernstein analysts and others on Wall Street is that NBC Uni's non-cable businesses will underperform Street expectations based on Thursday's management conference calls about the deal. That part of the company will see declining operating cash flow by the end of 2010 for the fourth straight year and will end up down about 80% since 2006.

Collins Stewart analyst Thomas Eagan said that the deal is "more dilutive than we expected" to Comcast's 2010 operating cash flow due to the lower than expected NBC Uni financial estimates. In addition, he signaled continuing concern about bringing together content and distribution asset, arguing that the "deal merits (are) still unconvincing."

Comcast Class A shares ended up 1.4% on Friday at $16.13.
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