NBC Universal-Comcast Will Eventually Exit Broadcast TV

Although they may provide little detail when they announce their NBC Universal merger Thursday morning, Comcast and General Electric intend to sell off the NBC-owned television stations and eventually collapse the NBC TV Network into existing or new cable properties.

Sources close to the discussions say Hearst Television, a major NBC affiliated TV station group, could be a likely buyer of or investor in NBC's 10 owned TV stations. Given the uncertainty about broadcast TV's future at a time when online video is upending traditional business models and valuations, the TV stations could be sold at a discount, well placed sources say.

Private equity investors who have been eager to participate in the NBCU-Comcast deal, could be involved in a TV station transaction. Hearst, Comcast and NBC officials decline comment. Other major NBC-affiliated TV station group owners such as Gannett or Belo also could be interested in investing in all or some of the NBC TV stations.

The spin-off of the NBC TV stations would be a separate transaction and may not be discussed when the NBCU-Comcast merger is announced Dec. 3. In fact, NBCU and Comcast executives initially may deny any such plans and seek to maintain the status quo in order to sort out such sensitive matters in their own time.

Plans for NBCU to exit the broadcast network and TV station business would cause seismic shock to an industry that is groping for digital strategies while juggling legacy costs and declining advertising revenues. In that sense, the NBCU-Comcast deal will be a catalyst for this and other inevitable transformative changes in media.

Selling the television stations would eliminate a potential obstacle to regulatory approval in order to more swiftly close the deal. The overlapping ownership of NBC TV stations and Comcast cable systems in major markets such as Los Angeles and Philadelphia will contribute to anti-competitive concerns by federal regulators that could require the eventual sale of the stations. The spin-off of the TV stations could come as early as 2010 during the regulatory review, sources say.

Comcast will have a 51 percent controlling ownership of NBCU and GE will reduce its 80 percent ownership to 49 percent, with plans to gradually exit the business within seven years. Comcast's primary interest is merging its $7 billion in cable networks with NBCU's dominant cable networks to gain a foothold in broadband programming online and on mobile devices.

Sources say Comcast, which will continue to operate its dominant cable systems separately, has no interest in assuming the responsibility and declining losses associated with owning broadcast TV networks or stations.

Fourth placed NBCTV will post a loss this year on declining revenues. The NBC TV Network and TV stations which have been in a free fall contribute only about 14 percent of NBCU earnings. NBCU's overall revenue growth, which will drop a record 10 percent this year, will never gain more than 4 percent annually over the next five years, according to Credit Suisse analyst Spencer Wang.

JP Morgan analyst Stephen Tusa says normalized contribution by the NBC TV network and stations will shrink to $893 million of NBCU's overall $2.5 billion in operating income in 2009. The lion's share, or $2.3 billion in operating income, will be generated by its cable networks.

That is why Comcast could easily justify rerouting NBC TV Network news and entertainment programs to new or existing NBCU cable networks (such as CNBC, MSNBC and USA), where costs can be offset by both advertising revenues and subscription fees. Such a move could take several years and would have to wait at least until the end of the current prime time season and NBC TV's contracts with program producers, advertisers and others.

Under one possible scenario, the NBC News, CNBC and MSNBC brands could be organized into a single news unit servicing cable, online and mobile devices. The same could occur with all of NBCU's and Comcast's sports, children's and daytime program franchises, sources say.

The programming also could continue to feed Hulu, the ad-supported online video service co-owned by NBCU, Disney's ABC and News Corp.'s Fox, which is expected to begin selectively charging for content early in 2010.

Former News Corp. COO Peter Chernin, who is advising Comcast and NBCU on the merger, was a co-creator of Hulu. Knowledgeable sources say Chernin is expected to play a pivotal role at the new NBCU with the restructuring of traditional media business and the creation of new online paid content models and exhibition windows for theatrical films.

GE is in a financial bind and needs to quickly do the NBCU deal in order to ameliorate a string of obligations. Some analysts estimate that GE could be leaving as much as $10 billion in value on the table just to get the NBCU deal done now. GE must buyout Vivendi's existing 20 percent stake in NBCU for $5.8 billion and raise up to $20 billion in capital to fund its core industrial businesses next year, according to Stern Agee analyst Nicholas Heymann. GE will attach $9 billion in debt to the new NBCU. "This whole thing is like a ball of yarn rapidly unwinding," Heymann said.

Other NBCU assets that Comcast could eventually sell or monetize by bringing in additional partners include Universal Studios and the theme parks. Those issues can be addressed once the merger is completed within about a year.