Comcast NBCU spinoff raises hopes for M&A. There are no good options

Analysts think Comcast starts deals. Comcast leadership says they are wrong.

The company announced on Monday that it plans to separate its two main businesses – cable broadband and the media units of NBCUniversal and Sky. It’s the second major structural change at the decades-old company in recent months, and it raises questions about possible future deals or the company’s share.

But on a call with investors to discuss the split, Comcast executives came ready with cold water:

“Not at all,” Comcast CEO Brian Roberts said Monday, when asked if investors should consider the breakup as a possible future issue.

Roberts, the son of founder Ralph Roberts and Comcast’s controlling shareholder, will not be CEO of either company after the split but will continue to be “involved” in the leadership of both companies, Comcast said.

“This is the right move to put each company in the strongest position to create value, fully monetize their assets, and pursue their organic growth strategies,” Roberts said.

Co-CEO Mike Cavanagh emphasized that rejection: “On the part of NBCUniversal and [with] Sky, definitely not.”

The reason Comcast ended the deal speculation? There may not be many good ones left.

Wall Street and industry watchers have called for a breakup of Comcast for years, spurred by the rise of broadcasting and fierce competition in the media industry.

While company leaders have discussed parting ways at various points since at least 2019, management has not considered it until now, according to a person close to the situation who spoke on condition of anonymity because of the confidentiality of the discussions.

When Comcast decided to spin off its TV networks into a separate publicly traded company less than two years ago — the spinoff would become the parent of CNBC. Versant Media Group — the prospect of snapping up NBCUniversal as a whole never materialized, the person said.

Instead, moves to separate NBCUniversal and Sky from the Xfinity cable business have gathered pace in recent months, the person said.

Wall Street recently saw a big media deal following the announcement, noted Mike Proulx, director of research at Forrester. Before The acquisition of Warner Bros introduced a sales process that resulted in paying bids from Netflix again Paramount Skydance, WBD said it plans to split its assets into two companies.

“Comcast is following a playbook we’ve already seen. Warner Bros. Discovery separated itself as it entered into a deal with Paramount. Now Comcast is doing the same with NBCUniversal. History is important here because Peacock is increasing NBCUniversal’s buying power,” Proulx said.

It comes against a background of widespread integration. Paramount Skydance itself is the product of a merger that closed about a year ago. Soon after it closed, it battled the streaming giant Netflix of WBD goods.

Smaller deals have also hit the market, as the media industry faces changing consumption habits. Earlier this month A fox agreed to buy a streaming platform company Roku for $22 billion. And broadcast channel owners have been eager to consolidate to gain scale.

Aside from bidding on WBD, Comcast has stayed away from M&A and focused on its own businesses.

“It’s no surprise that both the media and telecom spaces have become increasingly competitive and that pace of change continues to accelerate. We just don’t see these conditions changing any time soon,” Cavanagh said on Monday’s phone call.

Cavanagh will be CEO of the media business after the spin-off, Comcast said.

“Our plan for NBCUniversal and Sky is to build and invest in order to grow. We have a strong desire to pursue opportunities that keep us ahead of changing consumer behavior and viewer demands, and we have the freedom now to explore nearby business where we have the right to play,” said Cavanagh.

The motivation for splitting up a company is often to open up more deal opportunities. Still, it’s unclear whether the newly formed NBCUniversal and Sky assets company can test out without major regulatory challenges.

First, the home broadcast network NBC creates various obstacles. The company will not be able to merge with a company that has another national network, which is successfully taking over Disneyowner of ABC, and Paramount Skydance, owner of CBS off the table.

Even eliminating broadcasters from the equation, a deal with Paramount Skydance – which has been busy in stores under new CEO David Ellison – will take some time to complete following the completion of its deal with WBD.

Fox, the remaining major player in linear TV, has not partnered with traditional media after shedding its entertainment assets years ago and likely has no desire to land another contract after its Roku deal.

Through the WBD sales process Netflix has shown that it is open to making deals – with the right assets.

But Netflix’s interest in WBD was in its film studio and broadcast properties, sidelining WBD’s line of networks. Even with big sports properties like NFL Sunday Ticket, NBA and other top movie content, it’s hard to imagine that Netflix can make such a change and enter linear TV with a speculative deal with NBCUniversal.

That leaves little on the table when it comes to media deals, the biggest players being talked about. Comcast did not specify Monday what it expects the company to be worth after the spin-off, but between Universal’s theme parks business, a large, albeit small, broadcast value and a venerable content library, NBCUniversal may be too big for a smaller player to swallow.

On the cable side, it may be the same situation.

Comcast’s remaining assets after SoundBand’s exit — broadband, mobile and pay TV under the Xfinity brand — have gone from booming to stagnant and often quarterly losses of broadband customers as competition has increased from wireless and satellite providers.

The market immediately rewarded the stock of Charter Communicationsanother cable giant in the midst of completing separate acquisitions, Monday after Comcast’s announcement.

Shares of Charter rose 10%, indicating that investors may favor a merger between Comcast and Charter, which combines two of America’s largest cable companies.

Charter and Comcast have both invested heavily in their broadband networks and mobile businesses, as competition has intensified. They are part of a joint venture where Charter cable TV customers can use Comcast’s Xumo devices to broadcast.

They also aggressively changed pricing packages to pursue and retain customers. But such movements have done little to any stock price.

There is some historical precedent that is fueling Wall Street’s anticipation of a potential deal. Comcast attempted to acquire Time Warner Cable in 2014. When Comcast withdrew its bid amid opposition, Charter scooped up the property — becoming the nation’s second-largest U.S. provider. Most of today’s Charter was Time Warner Cable.

Still, there’s reason to be skeptical, according to MoffettNathanson analyst Craig Moffett. The Justice Department was poised to block the Comcast-Time Warner Cable deal. Even if the proposed Comcast-Charter deal gets federal approval, it would require state approval, which may not be easy in Democratic-controlled states like Massachusetts, Illinois and Maryland, Moffett said in an interview.

“You have to deal with the rigors of individual state commissioners,” Moffett said. “There could be strong opposition in traditionally green states that oppose a merger like this.”

There are also a number of liabilities that could come with such a combination, according to a person close to the matter.

Charter is in the midst of closing its merger with Cox, which will leave it with more than $100 billion in debt after taking on Cox’s debt. Considering that Comcast carries a huge debt burden after the move to reduce NBCUniversal – a hallmark of the Versant spinoff was the low debt value of the new company – combining the two cable companies will create a huge debt burden, this person said.

There are also strategic questions about the Charter-Comcast deal. In 2014, when Comcast tried to buy Time Warner Cable, one of the driving forces behind that transaction was the ability to gain leverage over media programmers in TV cart disputes by adding subscribers. After more than a decade, the cable TV business is a very small part of both Charter and Comcast, reducing the value of this potential partnership.

There are several broadband synergies from having multiple customers, Moffett said. Cable businesses are local operations that are least affected by adding scale, he said.

“Your cost structure in Chicago is not materially affected if you own the systems in North Carolina,” Moffett said.

To be sure, Comcast’s former chief financial officer and incoming CEO of cable assets post-spin, Michael Angelakis, said Monday he believes the company has the network assets it needs to compete.

Instead of buying right away, Comcast may be looking at the next few years.

“It may not be immediate. But I think it probably sets the stage on the M & A front,” said Jonathan Miller, a veteran of the media industry, who currently works as the CEO of Integrated Media, which specializes in digital media investments.

“This is done honestly with the goal of having more choice in different opportunities,” Miller added.

The timing of the future agreement may come down to technicalities. Comcast estimated a one-year timeline for closing the split. After that, US tax regulations force potential buyers to wait a long time before receiving the newly minted product. However, depending on details such as the nature of the deal and the timing, there are varying degrees of how long a company should wait, said an average person.

Disclosure: Versant Media Group is the parent company of CNBC.