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Estimating The Real Cost Of Comcasts Investment InNBC Universal
Group 14
Abhishek Agrawal 12P122
Amit Dubey 12P125
Ladlee Rathore 12P144
Manoj Kapoor 12P147
Kawaljeet Singh 12P208
Vignesh Patil 12P177
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Comcast Corporation
Originally formed as American Cable Systems in 1963
In 1996, Comcast launched Comcast Online, a broadbandInternet service. ( purchased Sarasota Online)
In December 2005, Comcast announced the creationof Comcast Interactive Media (CIM), a new division focused ononline media.
In 2009 , at time of merger deal , Comcast was primarily a
cable company and provider of programming content.
Company had 23.8 million cable customers, 15.7 million highspeed internet customers and 7.4 million voice customers.
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General Electric : NBC
Universal In 1995, NBC began operating NBC Desktop Video,
a financial news service that delivered live video topersonal computers
In 2003, GE acquired 80 % stake in Vivendi.(universal studios production , distribution , themeparks and cable television channels )
Parent company, GE had a wide portfolio consistingof Energy, Technology Infrastructure, CapitalFinance and Consumer & Industrial
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Why the merger ?
Comcast Corporation
Threat from online video
Competition from satelliteand phone companies thatoffer subscription TV services
Offset any threat of its cablecustomers shifting to TVprograms online.
More control over the videos
Could offer movies-on-demand channels ahead of oron the same day as a DVDrelease
NBC
GEs desire to exit the
business. Focus on core
business
Deteriorating state ofbroadcast televisionindustry
Deal will help GE to reduce
its debt which got affectedin 2008 crisis
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Merging the Assets
Comcast assets
Regional sports network
Two entertainment sites
Cable channels
NBC assets
Cable channels
Broadcasting networks
10 local TV stations
TV production & distributionstudios
Theme parks
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Available Options
Put option
Allowing it to sell one half of itsinterest after 3.5 years and theremaining half at the end of the 7thyear
Conditions
1. JV is obligated to buyout GE only ifits debt did not exceed 2.75 times itsEBITDA as a result of buyout
2. JV is able to maintain investmentgrade credit ratings
Call option
Comcast has a call option to buy GEsinterest at specific intervals
Condition
1. Comcast has to pay a 20% premiumto the public market value of its stock
Comcasts call option strategy will be funded purely from
the cash flows of this JV and if the CF fall short, Comcastwill spend $ 5.75 bn in cash or stock to buyout GE
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Financial Transactions
COMCAST JV
NBC
$ 37.25 Billion
Debt: $ 9.1 Billion
Vivendi: $ 5.8 BillionTransaction Cost & Pre-Closing Debt: $ 1.8Billion
$ 7.25 Billion
6.5 + 9.1 5.8 1.8 = $ 8 Billion
* There would also be a TAX consideration on NBCs profit further reducing the profit
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Question 01- Speculate as to why GE may have found it difficult tomanage NBC Universal.
Answer-
GE wanted a balanced capital allocation plan which meant allocatinginvestment from the non-core business to the core businesses i.e.finance and infrastructure
To reduce overall debt of a recession-hit GE
Deteriorating economics of the Tele-vision industry
Decline in overall Ratings & Advertising
To reduce overall debt of a recession-hit GE
GEs desire to exit a business that never quite fit well with its industrial
side
GE wanted a balanced capital allocation plan which meant allocatinginvestment from the non-core business to the core businesses i.e.finance and infrastructure
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Question 02- Debt liability of $ 9.1bn
Answer-
Comcast
Debt obligation: 9.1*0.51 = $4.64 Billion
Cash transfer to NBC: $6.5 Billion
Assets of Comcast: $7.25 Billion
Total: $18.39 Billion NBC
Debt obligation: 9.1*0.49 = $4.46 Billion
Cash transfer from Comcast: $(6.5 Billion)
Cash transfer from JV: $(9.1 Billion)
Assets of NBC: $30 Billion
Total: $18.86 Billion
Total Value of the JV: $37.25 Billion
Actual Stake of NBC: 37.25*0.49 = $18.25 Billion
Actual Stake of NBC: 37.25*0.51 = $19.00 Billion
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Issues for FCC
The FCC has jurisdiction over the merger by virtue of the transfer ofbroad-cast licenses between NBC and Comcast
Proposal of TV everywhere concept which links online mediaviewing with TV subscription fees (between Comcast and TimeWarner)
The opponents of merger claimed that post merger entity will holdmassive wealth of premium content which may be anti competitiveand anti consumer
Allegations of dividing markets, raising prices for subscription andexcluding new competitors
The proposed transaction creates the possibility that Comcast-NBCU,either temporarily or permanently, will block Comcasts videodistribution rivals from access to the video programming
Post vertical integration price increases will result for Comcast-NBCUnational cable programming
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Conditions imposed by FCC
Ensuring Reasonable Access to Comcast-NBCU Programming forMultichannel Distribution
Offers standalone broadband Internet access services atreasonable prices and of sufficient bandwidth so that customerscan access online video services without the need to purchase a
cable television subscription from Comcast. Does not enter into agreements to unreasonably restrict online
distribution of its own video programming or programming ofother providers.
Provides to all MVPDs (multichannel video programming
distributors), at fair market value and non-discriminatory prices,terms, and conditions
Protecting Diversity, Localism, Broadcast and Other PublicInterest Concerns
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Question 03- Speculate as to the potential circumstances in whicheither Comcast or GE would be likely to exercise its call/put options.
Answer-
In our opinion, Comcast is likely to exercise its call option because offollowing reasons:
Comcast had set aside $5.78 bn for a two staged process exit for GE, if thecash flows are not enough from this JV to exit GE
Comcast are ready to pay 20% premium in the call option, over the marketvalue ofGEs stake
Comcast wanted to mitigate risk of acquiring the whole entity and use thecash proceeds from the JV to exit GE, but were bullish on the synergiesbetween content creation and distribution
Circumstances which may lead to exercise of options by either party: If the synergies between NBC and Comcast materialise with expected free
cash flows which the Comcast had projected GE may exercise if they get a good premium for their stake as they had
already mentioned of exiting the media business and invest in
infrastructure
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Question 04- Challenges in integrating the various businessesof Comcast & GE that make up the joint venture
Answer-
So the major challenges were to :
Coordinating and developing the minority suppliers of NBC with Comcast
Maintaining operational efficiency when the board constituted 3 membersout of 5 of Comcast but the CEO of JV was from NBC
Integrating minority businesses of NBC including theme parks, which maynot fully align with Comcasts business plans
To create councils to promote employee diversity to represent stakes ofminority shareholders in NBC
Maintaining and operating Hulu.com, which may create a conflict between
paid content and free content service of Comcast and NBC resp.
Create synergies between integration of TV subscription and onlineaccessibility, which was one of the major drivers of JV
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Post Merger Position & Strategy
Case of vertical integration
Comcast plans to invest $300 million more on broadcast and cableprogramming in 2011-12
Lower earnings in the beginning due to the launch of NBC's new fall season
During the first six weeks of the new TV season, NBC's ratings were down11% in the key audience demographic of viewers
Comcast realizes that they need to spend more to address following issuesthat had developed because of ill-fated management decisions by NBC'sprevious owner
hiring of producer Ben Silverman to program the NBC broadcast network
GE's relentless demands that NBC Universal executives find ways to reducespending to help shore up the industrial giant's bottom line
Comcast cancelled few shows and added some new
Company plans that cable will drive 80% of its revenue, and its Internetpresence will be expanded
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Thank You
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