Comcast-NBCU Could Lead to Sale of NBC TV Network, Stations

Don't be surprised if Comcast (CMCSA) arranges to sell the NBC broadcast network and its TV stations to a third party after announcing plans to buy controlling ownership of NBC Universal as early as this week.

Potential buyers for the NBC TV network and its 10 owned TV stations (in the top 25 markets) could include major NBC affiliated television groups owners such as Hearst, Gannett (GCI), Belo (BLC), and E.W. Scripps (SSP).

Broadcasting is only 15 percent of NBCU's profit mix even though it generates 36 percent of the company's overall revenues, according to Bernstein Research. Broadcasting will increasingly be a drag on overall earnings if NBC remains fourth in prime time ratings and recovery from the advertising recession is slow.

Consumers and advertisers continue shifting to the Internet, where the economics cannot support broadcasters' costly programming and operating costs. NBC, ABC, CBS and Fox each spend between $2 billion and $3 billion annually on program production. Less than 90 percent of newly produced prime time series survive to a second season.

The NBC TV Network and its owned TV stations are valued at about $6 billion of the NBC Universal's overall $35 billion value, according to analysts. The NBC TV Network last year generated $4.4 billion in revenue, which is expected to decline to $3.5 billion in 2009. The NBC-owned TV station group last year generated $1.4 billion in revenues, which will drop below $1 billion in 2009. NBC's Spanish language Telemundo network and TV stations generated a combined $1.2 billion revenues in 2008, according to Citigroup.

Comcast will acquire 51 percent ownership by contributing $6 billion in cable networks and as much as $6 billion in cash to a standalone NBCU in a deal that could be valued around $30 billion. General Electric (GE), which would remain a co-owner of NBCU, would attach about $12 billion in debt to the spin-off. The deal hinges on Vivendi SA (VIVEF) selling its existing 20 percent stake in NBCU to GE, a third party, or the public in a stock offering.

Selling the storied NBC peacock network and stations would eliminate one potential regulatory snag. Cross-ownership rules may not allow overlapping NBC-owned TV stations and Comcast cable systems in Philadelphia, Chicago and San Francisco. About half of NBCU's 26 NBC and Telemundo television stations also overlap in some of the same markets. It is unclear whether Comcast also would sell the Telemundo network and TV stations. Comcast has been meetings with bankers about its plans for NBCU and declines comment.

A decision to sell the NBC TV network and stations would reflect rising caution among media dealmakers preferring to cherry-pick and pay for only the strongest, most strategic assets.

I believe that if Comcast was creative and bold enough, it could retain and refashion the NBC TV Network into several cable networks, which benefit from dual advertising and subscription revenues. NBC TV and Telemundo could be divided into up into general news, sports, drama, comedy and Spanish language cable networks. NBC's network spoils also could be spread across NBCU's portfolio of profitable cable networks that includes CNBC, MSNBC and USA.

A driving force behind the deal is Comcast's desire to be a bigger player in the $11 billion television sports market by combining its regional operations with NBC's valuable sports franchises (including future Olympic Games telecast rights) to create a stronger competitor to Walt Disney's (DIS) ESPN.

Removing the NBC TV network and TV stations from merged entity would eliminate risks related to broadcast television's declining business model. Major consolidation and changing economics resulting from the migration of video to the Internet and to mobile devices will dramatically alter TV station ownership.

Another major risk: billions of dollars of coaxial cable invested by Comcast and other cable operators is gradually being upended by the Internet's streaming video. For now, Comcast is the nation's largest media company and cable operator with nearly $30 billion in annual revenues. But, if broadcasting's digital fortunes are any indication, it may not stay that way.