Estimating The Real Cost Of Comcasts Investment In NBC Universal

Group 14 Abhishek Agrawal 12P122 Amit Dubey 12P125 Ladlee Rathore 12P144 Manoj Kapoor 12P147 Kawaljeet Singh 12P208 Vignesh Patil 12P177

Comcast Corporation

Originally formed as American Cable Systems in 1963

In 1996, Comcast launched Comcast Online, a broadband Internet service. ( purchased Sarasota Online)
In December 2005, Comcast announced the creation of Comcast Interactive Media (CIM), a new division focused on online media. In 2009 , at time of merger deal , Comcast was primarily a cable company and provider of programming content. Company had 23.8 million cable customers, 15.7 million high speed internet customers and 7.4 million voice customers.

General Electric : NBC Universal

In 1995, NBC began operating NBC Desktop Video, a financial news service that delivered live video to personal computers In 2003, GE acquired 80 % stake in Vivendi. (universal studios production , distribution , theme parks and cable television channels ) Parent company, GE had a wide portfolio consisting of Energy, Technology Infrastructure, Capital Finance and Consumer & Industrial

Why the merger ?

Comcast Corporation

NBC

Threat from online video Competition from satellite and phone companies that offer subscription TV services Offset any threat of its cable customers shifting to TV programs online. More control over the videos

GEs desire to exit the business. Focus on core business Deteriorating state of broadcast television industry Deal will help GE to reduce its debt which got affected in 2008 crisis

Could offer movies-ondemand channels ahead of or on the same day as a DVD release

Merging the Assets

NBC assets
Comcast assets
Regional sports network Two entertainment sites Cable channels Cable channels Broadcasting networks 10 local TV stations TV production & distribution studios Theme parks

Available Options

Put option
Allowing it to sell one half of its interest after 3.5 years and the remaining half at the end of the 7th year Conditions 1. JV is obligated to buyout GE only if its debt did not exceed 2.75 times its EBITDA as a result of buyout 2. JV is able to maintain investment grade credit ratings

Call option
Comcast has a call option to buy GEs interest at specific intervals Condition 1. Comcast has to pay a 20% premium to the public market value of its stock

Comcasts call option strategy will be funded purely from the cash flows of this JV and if the CF fall short, Comcast will spend $ 5.75 bn in cash or stock to buyout GE

Financial Transactions
$ 37.25 Billion COMCAST

$ 7.25 Billion

JV

Debt: $ 9.1 Billion

NBC 6.5 + 9.1 5.8 1.8 = $ 8 Billion Vivendi: $ 5.8 Billion Transaction Cost & Pre-Closing Debt: $ 1.8 Billion

* There would also be a TAX consideration on NBCs profit further reducing the profit

Question 01- Speculate as to why GE may have found it difficult to manage NBC Universal.

Answer

GE wanted a balanced capital allocation plan which meant allocating investment from the non-core business to the core businesses i.e. finance and infrastructure To reduce overall debt of a recession-hit GE Deteriorating economics of the Tele-vision industry Decline in overall Ratings & Advertising To reduce overall debt of a recession-hit GE GEs desire to exit a business that never quite fit well with its industrial side

GE wanted a balanced capital allocation plan which meant allocating investment from the non-core business to the core businesses i.e. finance and infrastructure

Question 02- Debt liability of $ 9.1bn

Answer

Comcast

Debt obligation: 9.1*0.51 = $4.64 Billion Cash transfer to NBC: $6.5 Billion Assets of Comcast: $7.25 Billion Total: $18.39 Billion Debt obligation: 9.1*0.49 = $4.46 Billion Cash transfer from Comcast: $(6.5 Billion) Cash transfer from JV: $(9.1 Billion) Assets of NBC: $30 Billion Total: $18.86 Billion

NBC

Total Value of the JV: $37.25 Billion Actual Stake of NBC: 37.25*0.49 = $18.25 Billion Actual Stake of NBC: 37.25*0.51 = $19.00 Billion

Issues for FCC

The FCC has jurisdiction over the merger by virtue of the transfer of broad-cast licenses between NBC and Comcast Proposal of TV everywhere concept which links online media viewing with TV subscription fees (between Comcast and Time Warner) The opponents of merger claimed that post merger entity will hold massive wealth of premium content which may be anti competitive and anti consumer Allegations of dividing markets, raising prices for subscription and excluding new competitors The proposed transaction creates the possibility that Comcast-NBCU, either temporarily or permanently, will block Comcasts video distribution rivals from access to the video programming Post vertical integration price increases will result for Comcast-NBCU national cable programming

Conditions imposed by FCC

Ensuring Reasonable Access to Comcast-NBCU Programming for Multichannel Distribution

Offers standalone broadband Internet access services at reasonable prices and of sufficient bandwidth so that customers can access online video services without the need to purchase a cable television subscription from Comcast.
Does not enter into agreements to unreasonably restrict online distribution of its own video programming or programming of other providers. Provides to all MVPDs (multichannel video programming distributors), at fair market value and non-discriminatory prices, terms, and conditions Protecting Diversity, Localism, Broadcast and Other Public Interest Concerns

Question 03- Speculate as to the potential circumstances in which either Comcast or GE would be likely to exercise its call/put options.

Answer

In our opinion, Comcast is likely to exercise its call option because of following reasons:

Comcast had set aside $5.78 bn for a two staged process exit for GE, if the cash flows are not enough from this JV to exit GE Comcast are ready to pay 20% premium in the call option, over the market value of GEs stake

Comcast wanted to mitigate risk of acquiring the whole entity and use the cash proceeds from the JV to exit GE, but were bullish on the synergies between content creation and distribution

Circumstances which may lead to exercise of options by either party: If the synergies between NBC and Comcast materialise with expected free cash flows which the Comcast had projected GE may exercise if they get a good premium for their stake as they had already mentioned of exiting the media business and invest in infrastructure

Question 04- Challenges in integrating the various businesses of Comcast & GE that make up the joint venture

Answer

So the major challenges were to :

Coordinating and developing the minority suppliers of NBC with Comcast Maintaining operational efficiency when the board constituted 3 members out of 5 of Comcast but the CEO of JV was from NBC Integrating minority businesses of NBC including theme parks, which may not fully align with Comcasts business plans

To create councils to promote employee diversity to represent stakes of minority shareholders in NBC
Maintaining and operating Hulu.com, which may create a conflict between paid content and free content service of Comcast and NBC resp.

Create synergies between integration of TV subscription and online accessibility, which was one of the major drivers of JV

Post Merger Position & Strategy

Case of vertical integration

Comcast plans to invest $300 million more on broadcast and cable programming in 2011-12
Lower earnings in the beginning due to the launch of NBC's new fall season During the first six weeks of the new TV season, NBC's ratings were down 11% in the key audience demographic of viewers Comcast realizes that they need to spend more to address following issues that had developed because of ill-fated management decisions by NBC's previous owner hiring of producer Ben Silverman to program the NBC broadcast network GE's relentless demands that NBC Universal executives find ways to reduce spending to help shore up the industrial giant's bottom line Comcast cancelled few shows and added some new Company plans that cable will drive 80% of its revenue, and its Internet presence will be expanded

Thank You