Comcast and the "curse" of "diversified holdings" companies $CMCSA
The reason for the "thought swap" was (obviously) Comcast's recent bid to buy Sky, which is what I want to focus on here (I'll give some thoughts on Comcast's valuation at the end of this post if you're interested). The market reaction to the Sky bid has been awful: Comcast's shares were immediately down >5% on news of the bid, have declined >10% in the past month (and taken most of the cable sector down with it), and analysts and investors have been rushing to criticize / downgrade the company. The reaction certainly makes sense: investors wanted to see Comcast increase its leverage by increasing share buybacks, not take on debt to diversify out of their cable business and into a European satellite business. You can tell management was ready for this criticism: their 19 page acquisition deck included three "trust us; we have a good track record" slides (slides 14-16), and management has responded to the criticism by saying (this is my summary of their words) "you doubted us when we bought AT&T broadband and you doubted us when we bought NBC; both of those turned out great so trust us here".
As I read CMCSA’s arguments for why buying SKY made sense, I couldn't help but thinking of the Exor (disclosure: long) investor day. Slide 45 of their deck (plus a small supplemental deck) showed how companies owned by “diversified holdings’” companies tend to outperform markets over time, and the diversified holdings companies themselves tend to outperform their own holdings.
It is crazy to me how much market value Comcast has lost for this Sky bid. Comcast is offering to buy Sky for ~$41B EV, which comes out to ~$6B more than Fox was offering and ~$16B more than SKY was trading for before Fox made a bid for them way back in December 2016. With CMCSA shares down >10% since the bid, the market has knocked >$20B off of Comcast’s market value. So the market is basically saying that by offering to buy Sky, a business that Disney said was “a real crown jewel”, for a bit more than 12x EBITDA, Comcast’s capital allocation has gotten so out of control that they need to discount not just Comcast overpaying for Sky but a continued future of poor capital allocation at Comcast. Count me a skeptic on that bet.
Why buy Comcast today? Because it’s probably the cheapest of the cable companies despite having the most scale, the most evolved wireless strategy, some of the best assets, etc. To put it in perspective, Comcast’s cable business, which is ~25% bigger than Charter’s, is currently selling for less than Charter. There are a lot of assumptions in here (assuming NBC is worth 9x EBITDA, not giving Charter value for their NOLs, etc.), but they’re not big enough to swing the core takeaway (that the market is seriously discounting Comcast).
The chart above does not add back the ~$500m Comcast has lost investing in the wireless business over the past twelve months (I simply allocates the losses by revenue as part of SG&A spend). Those losses will get worse before they get better, and Comcast is not alone in prepping to spend significant amounts on wireless. Charter will start that investment in the middle of this year, and Altice will begin their wireless strategy sometime in 2019. Given cable’s infrastructure advantage and the track records of the parties making the wireless investment, I’d guess the wireless investments are NPV positive for all of them, but given Comcast’s scale and that they’ll be starting quicker I’d guess Comcast’s investment has better returns than Charter’s and both of them have significantly better returns than Altice’s.
While we’re on Altice, I’ve talked to quite a few people about ATUS as we head into their share spin / big dividend. It’s definitely an interesting set up: given their high leverage and low capex, on a cash flow to equity story Altice is crazy cheap. And the combo of a nice share repurchase, a big dividend, and a huge distribution of shares in kind to Altice NV shareholders (forced selling? Sloppy trading?) makes for a really interesting event story. Still, I’m not sure it’s sustainable for Altice to run margins this high and capex this low (remember, Altice USA’s model is based on following the Altice Europe blueprint, and Altice Europe sort of blew up last year) , and I figure in the long run I’ll win either way by investing in Charter. If it turns out Altice’s model is sustainable, then Altice will buy Charter for a premium and realize a ton of synergies. If it turns out the Altice model is not sustainable, Charter will buy Altice in distress at some point in the future. Win/win.