Why at Least One Analyst Really Likes GE/Comcast NBCU Deal
Feb 13th 2013 10:35AM
Many times on Wall St., blockbuster deals make analysts at big investment banks nervous. The deal is risky, the debt burden is stifling, the culture at the corporations that are involved will clash and so on. Judging by the initial media and financial press reactions, the Comcast Corp. (NASDAQ: CMCSA) purchase of the remaining 49% of NBC Universal it did not own is very favorable. We wanted to dig down and find a Wall St. firm that could outline specific positives, and we did.
Today Credit Suisse Group A.G. (NYSE: CS) reiterated their Outperform rating on Comcast and raised their price target on the stock to $48. Comcast will pay General Electric Co. (NYSE: GE) $16.7 billion for the remaining 49% stake of NBCU. While noting that the valuation is not cheap (~7x EV/EBITDA), they feel that Comcast has best in class cable operations and that a higher growth rate driven by NBCU warrants a premium. They are raising their 2013/2014/2015 earnings per share estimates to $2.51/$2.85/$3.28 (from $2.46/$2.73/$3.06) respectively.
The analysts at Credit Suisse point to two specific reasons for liking the deal. First by acquiring the balance of the company, they eliminate two companies having separate pools of cash dedicated to the company. This gives Comcast direct access to all the free cash flow generated by NBCU. Secondly, they are bullish on the prospects for NBCU, citing solid earnings growth and potential driven by improvement in the broadcast operations of the parent network and solid cable contributions from financial network CNBC.
One additional outstanding part of the buyout package is that the deal includes GE's expanded commitment for future advertising, this is expected to be immediately accretive to earnings per share and could yield double-digit internal rates of return. Yet another reason for investors to like Comcast, which becomes a media giant with the completion of the purchase.
While the team at Credit Suisse points out that costs will increase for capital expenditures and programming, they are very positive on the current cable operations, a dividend increase and expectations for a $2 billion dollar repurchase of stock.
In the end this is a very positive deal for both parties involved. GE, which is also rated Outperform, takes in a tremendous amount of cash and divest themselves of a noncore asset at a good price. Credit Suisse also thinks the sale affirms that the enormous self-help potential at GE is starting to be realized, and this should drive share price outperformance. They raise their 2013/2014 earnings per share estimates to $1.69/1.89 (from $1.68/$1.86), moving up slightly due to higher industrial margins and from increased savings. They also raise their 2015 estimate to $2.02 (from $1.98) and move their price target on the stock to $25 from $24. Investors in GE also will be beneficiaries of an aggressive stock buyback plan.
The Comcast-GE deal is one in which both entities are able to strengthen and focus on their core business. In Comcast's case, it adds media content to its vast cable delivery. General Electric can focus its cash and efforts on the industrial, technological and financial services areas of the company.
Filed under: 24/7 Wall St. Wire, Cable Companies, Media, Mergers & Acquisitions, Mergers and Buy Outs Tagged: CMCSA, CS, GE