Media World: Comcast's quest for NBC Universal makes perfect sense

In early 2004, Comcast Corp. (CMCSA) stunned Wall Street and Hollywood by launching an unsolicited bid for one of the titans of American entertainment -- the Walt Disney Co. (DIS). Though that effort failed, the Philadelphia-based company's thirst for content has not been quenched, which is why reports indicating that it wants a piece of General Electric Co.'s (GE) NBC Universal makes perfect sense.

Comcast, the No.1 cable company, is in a much stronger position today than it was five years ago. Despite predictions that satellite and telecom companies would eat its lunch, Comcast has held its ground. During the second quarter, revenue rose 4.5 percent to $8.55 billion while operating cash flow gained 5.5 percent to $3.35 billion. Comcast had $3.98 billion in cash and cash equivalents at the end of the period even as it fought customer defections to rival services such as Verizon's (VZ) FioS. The company's shares fell $1.17, or 6.93 percent, to $15.71 in midmorning trading. GE, which has resisted calls by investors to dump the entertainment business for years, traded down 31 cents, or 1.89 percent, to $16.20.

According to Reuters, Comcast Corp and GE are discussing a deal under which the scourge of many Internet geeks would take control of 51 percent of NBC Universal, with GE keeping the rest. GE would then buy the 20 percent of NBC that it does not own from Vivendi SA and Comcast would provide cash and some programming assets. GE also may sell the entertainment business to another buyer or sell it to the public through an IPO.

As Bloomberg News notes, Chief Operating Officer Stephen Burke said at a Sept. 9 investor conference that Comcast is most interested in acquiring content companies. Burke also told the audience that Comcast was not interested in making a deal the size of Disney. Obviously, GE feels the same way about content, having lead a group of investors that snapped up the Weather Channel for about $3.5 billion last year.

NBC Universal, long a drag on GE's earnings, has an enterprise value of $21 billion to $23 billion, according to an analyst's report cited by Bloomberg. Second quarter revenue dropped 41 percent as earnings fell from broadcast television and its film studio. The cable unit was a bright spot with a seven percent gain on profit on a three percent increase in revenue. NBC is betting that comic Jay Leno will bring some of the popularity that helped him win the late night TV wars into the network's prime time schedule though the results are mixed at best. Several Universal Pictures films flopped at the box office including "Land of the Lost" and "State of Play," prompting The Wrap's Sharon Waxman to report a management shakeup was looming.

Comcast's media universe would easily gel with NBC Universal's. Its holdings range from E! Entertainment Television, whose programs appeal to women, to Versus, a macho sports channel featuring the National Hockey League and Mixed Marital Arts (MMA) fights to PBS Kids Sprout, the cable home to pre-school favorites including The Wiggles and Sesame Street. Moreover, the company controls the Philadelphia Flayers hockey team, 76ers basketball team and two large multipurpose arenas. Comcast also sells tickets to these events through its own ticket selling service, and owns nine regional sports networks including one in Philadelphia.

NBC Universal properties include MSNBC, CNBC, the Weather Channel and Bravo. The company also owns the Univision Spanish language broadcaster and the popular SyFy channel. In addition, there are the Universal theme parks and the broadcast network..

Very little overlap exists between Comcast and NBC Universal in terms of content. What really matters, though, are demographics. Advertisers rarely buy commercial time for a specific TV program. A combined company could sell advertising across channels to advertisers interested in reaching a certain audience, such as women. Targeting is easier to do on cable than broadcast television, which is why cable television proved to be more resilient than other forms of media as the economy turned sour. According to Nielsen, national cable TV was the only advertising sector to show an an increase in the first half of the year, with a 1.5 percent increase.

For Comcast, an alliance with NBC Universal will provide with the content it needs to feed its expanding media empire. One of the few downsides is the theme park business which probably will get sold regardless whether there is a deal or not. General Electric CEO Jeff Immelt will be able to silence critics who have hounded him for years about the poor performance of the entertainment business.

In the end, everybody wins.

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