Another prominent Wall Street analyst is calling for Comcast to split from NBCUniversal — undoing a merger that closed 10 years ago — in order to better unlock earnings and stock potential from both businesses.
“While each Comcast business is good, we believe it would be a much better stock if they were apart,” Wells Fargo analyst Steven Cahall wrote in a Wednesday report as he initiated coverage of the cable sector.
He started off Comcast with an “underweight” stock rating, the only such rating among the 28 analysts covering the company, and a $48 price target. And he became the latest Wall Street observer to call for a split of the Comcast cable systems and the NBCUniversal entertainment unit, along with European pay TV and content giant Sky.
Comcast management, led by chairman and CEO Brian Roberts, has long said that scale is key in today’s media landscape and that owning distribution, content and technology businesses gives it insight into the various parts of the sector that allows it to spot trends and go after innovation opportunities. It has also looked to turbocharge areas of growth, such as accelerating Sky’s push into original content with increased investment, and reacted to business and consumer changes, such as testing premium VOD film releases amid the novel coronavirus pandemic.
“NBCUniversal and Sky need to pivot to direct-to-consumer, yet Peacock is well behind peer initiatives,” Cahall argued. “The two assets’ needs are diverging, creating an incongruent company that we see going back to its 10-15 percent historical discount to its sum of the parts. Corporate action would make us more bullish.”
The analyst sees a separation as a way to “unlock value,” explaining: “Our approach is simple: separate cable from NBCU+Sky,” and boost the debt leverage in the cable business “for an increase in levered free cash flow and hence cash returns.”
Cahall argued that NBCU and Sky “could be acquired outright,” which he estimated could be 5 percent accretive after tax, or spun off tax-free to Comcast shareholders, which he calculated would be 13 percent accretive. But he prefers a third option, namely, merging the media assets with a potential partner or partners. “We think the No. 3 scenario is the most compelling given the strategic merits of scale as media gets more capital intensive on direct-to-consumer,” he said.
Cahall’s report included financial analysis of a combined NBCU/Sky and AT&T’s WarnerMedia, with the analyst seeing “this illustrative combination as creating value to Comcast shareholders of 20 percent.” His suggestion: the deal “should be pursued in earnest.”
Among other analysts who have suggested a Comcast split into its cable and media/content businesses, MoffettNathanson’s team wrote early in the year: “Our thoughts about the logical combination of NBCUniversal and WarnerMedia to give the combined companies the needed scale to compete with Disney and Netflix were reinforced by other conversations” across Hollywood.
On Tuesday, MoffettNathanson raised its price target on Comcast’s stock, which it rates a “buy,” from $56 to $68.