Comcast may be under pressure to split up its cable and media businesses and one analyst said that such a move could unlock value for both assets.
The Wall Street Journal reported late Monday that Trian Fund Management has taken a stake in Comcast and begun conversations with executives under the assumption that the company’s stock is undervalued.
“We have recently begun what we believe are constructive discussions with Comcast’s management team and look forward to continuing those discussions,” Trian said in a statement.
It’s unclear what Trian, which the report said is “known for pushing big companies to make operational and other changes,” is discussing with Comcast. But Jonathan Chaplin, analyst at New Street Research, was not surprised since Trian tends to focus on assets where there is a potential to unlock value though a break-up or divestiture. “We have argued value would be unlocked by splitting Comcast Cable and NBCU.”
Chaplin praised Comcast Cable for growing broadband revenue at a stable, predictable rate and growing EBITDA even faster. He said the division grows free cash flow even faster than EBITDA by maintaining constant leverage and funneling cash into share repurchases. He said NBCUniversal is less reliable.
“NBCU has been a great business, but its future is not nearly as predictable, as the media industry goes through major changes. Most of our clients tolerate exposure to NBCU on the basis that it is a good and under monetized asset in a tough industry; but, they own Comcast for Cable,” wrote Chaplin in a research note.
Lightshed analyst Rich Greenfield has also argued that Comcast could benefit from splitting up some assets.
“While we doubt Comcast would ever split itself up, we believe that value would be created by separating its assets, especially if it removed regulatory issues that prevent Comcast in its current form from making acquisitions. Food for thought, especially when you look at how the market is valuing a cable pure-play in Charter with bandwidth demands growing by the day,” wrote Greenfield in a research note.
Chaplin said that Comcast should pursue cable and other assets that can accelerate free cash flow and equity compounding growth.
“The best kinds of assets would be infrastructure assets that bring similar cash flows with operating leverage, pricing power and the ability to support financial leverage (wireless assets could fit the bill at some stage in the future, for example),” he wrote.