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Comcast Shares posted modest gains Wednesday after the company announced its plan to spin off all of NBCUniversal's cable networks — except Bravo — into a separate publicly traded entity.
The initial shrug from investors about the proposed transaction underlines the uncertainty of this maneuver.
The hope for Comcast is that by shedding dwindling assets, the company's shares will rise. Cable networks are still profitable, but are losing subscribers and revenue every year as Americans abandon traditional pay TV for streaming services. That could be an anchor for Comcast stock. Wall Street generally doesn't like assets with declining revenues and profits.
However, there is still a lot of uncertainty surrounding the spin-off. It's unclear whether Comcast investors will care that much. NBCUniversal's cable networks are relatively small assets, generating about $7 billion in revenue in the 12 months ended September 30, according to a Comcast press release. By comparison, the rest of Comcast generated about $116 billion in revenue.
It's also unclear whether the spun-off company will thrive as a publicly traded entity. If Comcast is divesting cable networks because Wall Street doesn't like them, why would shareholders want a company made up of declining assets?
There's a reason why Disney decided not to spin off its cable activities. The company thought about it and ultimately decided that the revenue lost from running profitable networks would trump any potential multiple expansion through a spin. Still, Disney's cable networks, including FX and Disney Channel, are more integrated with its streaming platforms than NBCUniversal's cable networks are with Peacock, the company's subscription streaming service.
The new company, temporarily called 'SpinCo', will generate cash and could pay a healthy dividend to shareholders looking to invest in dwindling cash assets. But that's usually more of a private equity strategy. That may ultimately be the direction cable networks are headed: toward private ownership willing to harvest them for money.
It's also possible that some cable networks could find new footing outside of NBCUniversal's ownership. Future SpinCo CEO Mark Lazarus may be able to strike new licensing deals with other streaming services now that the cable assets are not merely a marketing and content distribution tool for Peacock.
Profits for SpinCo could be reinvested in companies including CNBC and MSNBC, rather than funneled toward Peacock and NBCUniversal's theme parks.
Another possible path for the spinoff is as an amalgamation entity for other cable networks. Comcast is purposefully structuring SpinCo with low debt. Maybe the company can take some of it Warner Bros. Discoveries debt and its cable networks. The same could be said Big global.
The greater motivation
With so much unknown, Comcast probably won't do this, as it's certain the spin will be a blow to investors. Instead, Comcast's motivations may signal to the media industry that it's time to enter a new phase.
“There's simply not enough revenue in these businesses to cover costs,” Kevin Mayer, co-CEO of Candle Media and former Disney executive Kevin Mayer, said in an interview. 'Consolidation must take place now. It's Econ 101.'
That's a sentiment that Warner Bros. Discovery Chief Executive Officer David Zaslav said during his company's earnings call earlier this month.
“This is an industry that really needs meaningful consolidation,” Zaslav said. “If the best content is going to win, there needs to be some consolidation to make these companies stronger and provide a better consumer experience.”
In other words, even if SpinCo fails as a publicly traded company and Comcast doesn't get any expansion, it may simply be worth signaling to the media world that it's time for change. In the long run, trying something may be better than trying nothing at all.
One more thing: if Comcast wants to try a big merger in a Donald Trump administration, like buying an American cable company Charter or another telecommunications company, it might not be a bad idea to abolish MSNBC. The last time Trump was president, his Justice Department blocked AT&T's acquisition of Time Warner — reportedly because Trump wasn't a fan of CNN.
Comcast shares closed 1.5% higher on Wednesday.
Disclosure: Comcast's NBCUniversal is the parent company of CNBC.
