The move outlined in a new research report by CitiGroup analyst Jason Bazinet would put a squeeze on excess cash flow, but give Comcast complete leverage to make major changes in the media business. It is one in a handful of findings Bazinet made sifting through Comcast's public filings for its proposed 51 percent controlling ownership of NBCU.
Comcast has "ample capacity" to pay as little as $12 billion or as much as $17 billion to buy out GE in 2014, Bazinet said. The price ultimately depends on the performance of the new NBCU and of multiples for media stocks at that time.
GE would have to request an early buyout of its 49 percent stake in NBCU by 2014, two years earlier than called for in the new partnership agreement. The analyst estimates that the new NBCU will generate $4.2 billion in cash flow on $20 billion in revenues by 2014, up from 3.3 billion in cash flow and $18 billion in revenues in 2010. The new NBCU would be debt-free in 2014 and generating $2.5 billion in free cash flow.
Although Comcast will likely have sufficient cash flow and credit available to buy out GE in 2014, such a move would curb its ability to generate "significant incremental capital returns," Bazinet said in the report. Comcast recently announced a 40 percent dividend hike and plans to repurchase $3.6 billion in company stock over the next three years.
As a result, Bazinet removed Comcast from CitiGroup's Top Picks Live list, but maintains a "buy" rating and $19 per share price target.
Although Comcast has agreed to initially pay GE $7.1 billion in cash, that amount will be reduced to $6.5 billion in cash. The difference is $612 million, or 51 percent of NBCU's estimated cash flow in 2010 which Comcast is entitled to while the deal is awaiting regulatory approval.
Bazinet also said there is additional evidence of Comcast's major live sports ambitions which will be enhanced by its controlling ownership of NBCU. Comcast filings revealed it has a five percent profit participation stake in the Big Ten Network. Its other sports-related economic interests include a 6.5 percent equity stake in the Driver TV website, a 15.6 percent stake in the NHL Network, an 8.34 percent equity stake in MLB Network, and 100 percent stakes in the auto web sites AutoMall USA and Vehix.
Comcast will continue to leverage its Regional Sports Networks serving 35.4 million subscribers and generating about $450 million that is currently reported by as "other" revenues. Comcast's new online streaming sports service also is part of its strategy to create a rival to Walt Disney's ESPN.
Other interesting Comcast-NBCU deal findings from Bazinet:
- GE is committed to buy at least $59 million in advertising from the new company and an additional $50 million in advertising on NBCU exclusive telecast of the 2012 Olympic Games.
- Even with intra-company "eliminations," Comcast will pay an estimated 45 cents per subscriber for NBCU's lucrative cable networks.
- Comcast's systems will nationally carry nine of the new NBCU's consolidated cable channels on its Basic Plus program tier: USA, CNBC, MSNBC, Bravo, SyFy, Style and the sport-oriented Golf, G4 (games) and Versus networks. Those channels also will be joined by E!, Oxygen and Sprout on Comcast's Digital Plus tier. It is unclear how Comcast will continue to develop its free versus paid content strategies with control of NBCU's vast content.