Comcast, NBC Universal in talks to merge

Comcast Corp., which for years has yearned for a big entertainment division that could produce blockbuster movies and popular cable-TV shows, reached a broad agreement Thursday to merge its cable networks with NBC Universal, one of the nation’s storied TV and movie studios.

NBC Universal released the “Fast and Furious movies and “Brokeback Mountain, owns hit cable-TV networks USA and Bravo, produces award-winning TV shows “The Office” and “30 Rock,” and operates amusement parks in Hollywood, Orlando and Osaka, Japan. Its 4,000-title library contains the classics “Deer Hunter” and “Schindler’s List.”

Comcast would own 51 percent of the new private corporate entity, which would be valued at $35 billion, according to sources within Comcast who were not authorized to speak on the record. Beleaguered General Electric would own 49 percent. GE, whose financial and manufacturing divisions were battered in the recession, owns 80 percent of NBC Universal, and French company Vivendi SA owns the remaining stake.

There will be a “path-to-ownership” provision that would allow Comcast or General Electric to own 100 percent of the venture, sources said.

This multi-billion-dollar gambit, which was not warmly received on Wall Street, is the fruit of the persistence of Comcast CEO Brian Roberts, the Philadelphia company’s grand strategist who previously failed in his bid for the Walt Disney Co.

The deal would create a vertically integrated media conglomerate, with Comcast-controlled companies producing and distributing movies and cable-TV shows, and feeding Web sites with entertainment. It would be the largest company of its kind and seems to recreate the former Time Warner media empire. Time Warner recently separated its cable-distribution business and its entertainment businesses into different companies.

A Comcast-NBC Universal deal would not likely give consumers relief with lower cable bills. But it could slow the soaring growth of programming costs for Comcast, the nation’s largest cable company with about 24 million subscribers, analysts said.

The plan is certain to present challenges, and it is fragile at this state, according to observers and to insiders.

A merger of Comcast and NBC Universal would raise anti-trust concerns as to whether Comcast has an unfair advantage in the entertainment marketplace, said Art Brodsky, communications director for the advocacy group Public Knowledge. Other groups said they were waiting for the official announcement to comment.

A Comcast-NBC Universal deal could easily collapse because of its complexity, said a high-placed source. “It could just as likely fall apart.”

It may be weeks before an announcement is made. Comcast would not comment for the record. A General Electric spokesman said the talks were “really, really early.”

Success is partly contingent on Vivendi agreeing to part with its 20 percent stake in NBC Universal. Vivendi is expected to make a decision in November.

According to sources within Comcast, the new joint venture would pay General Electric $9 billion to $12 billion. This money would come from borrowings by the joint venture and be carried as debt. GE would pay Vivendi with some of this money.

Comcast would contribute to the joint venture, in addition to its cable networks, $4 billion to $6 billion in cash, sources said. The money would go to General Electric. Comcast would obtain this money from cash reserves and borrowings.

Comcast says the value of its cable networks is about $6 billion. Those networks include Style, E!, the Golf Channel and the regional sports networks.

GE, which was hurt by the credit crisis, badly needs cash, and sources within Comcast say it believes it is gaining control of the NBC Universal on favorable terms. Comcast would do the deal without diluting its stock and would maintain a cash-stock dividend and stock buyback program, company sources said.

A Comcast-NBC Universal would face regulatory scrutiny at the Federal Communications Commission because of the need to transfer 10 NBC broadcast TV licenses to the new corporate entity. A TV license for NBC10 in Philadelphia is among those that would be transferred. The deal also could face scrutiny at the Federal Trade Commission, industry experts said.

A concern would be whether Comcast can gain an unfair advantage through the integration of the different businesses. For instance, Comcast could produce big-screen movies. It also may control the release dates of movies, possibly giving itself an advantage over movie-rental firm Netflix, industry sources said.

Critics, in a review, also may ask how Comcast would treat other pay-TV providers, such as DirecTV and Verizon’s FiOS TV, in distribution deals for NBC Universal-owned cable-TV networks USA, Bravo and CNBC.

“There will be huge fights over content distribution and access to programming,” said Brodsky, of Public Knowledge. “There are all sorts of implications when you control that much distribution and that much product under one roof,” he said.

Wall Street reacted sullenly Thursday to the news of the deal, which was first reported on the Hollywood Web site on Wednesday evening. Comcast shares fell 7 percent, or $1.21, to $15.67. The decline was steeper than the overall stock market. The Dow Jones Industrial Average fell 2 percent.

Some analysts were perplexed by the proposed joint venture. “I would rather they buy more cable companies,” moaned one analyst, who asked that his name not be used.

“I don’t understand the fascination with content,” Craig Moffett, a telecom analyst with Sanford C. Bernstein & Co. LLC, who is typically upbeat on Comcast, said in an interview. In his newsletter, Moffett wrote Thursday morning:

“We expect investor reaction to be strongly negative. Investors have long pressed Comcast for an aggressive return of cash to shareholders. An acquisition of a major content studio, even if consummated at an attractive price, is most decidedly not what Comcast investors had in mind.”

This happened before. In 2004, Comcast attempted to purchase the Disney for more than $50 billion. Wall Street investors criticized Roberts for the unsolicited Disney bid, saying they expected him to use the cable operations cash flow to boost the company’s stock price ? not purchase Disney.

Roberts “never lived Disney down,” said Christopher Marangi, an equity analyst with Gabelli & Co. Inc. “He surprised everybody with it,” Marangi said. “From that point forward there has always been the question as to what he would do with the cash from the cable business.”

The NBC Universal deal is more modest than the Disney bid and comes as Roberts seems deeply concerned about the impact of the Internet on the cable-TV business. He has watched the Internet challenge the music and newspaper businesses and wishes to avoid a similar situation.

Comcast’s greatest fear is that cable-TV customers migrate to the Internet and cancel their cable-TV subscriptions. Some believe that Comcast hopes that by controlling more entertainment content, Comcast can somehow slow ? or even manage ? that migration between traditional cable-TV and the Internet.

“Comcast can use this as an opportunity to shape the digital future,” said Marangi.

“This gives Comcast a lot of control over how online distribution evolves,” added Moffett.

(c) 2009, The Philadelphia Inquirer. Source: McClatchy-Tribune Information Services.