Comcast Corp. opened its latest earnings call with a surprise announcement: The Brian Roberts-run media giant was weighing whether to spin out its cable TV channels into a separate “well-capitalized company” that “would position them to take advantage of opportunities in the changing media landscape.”
Was Comcast testing the waters? Sure. Comcast president Mike Cavanagh made it clear that the company was just beginning to look into the idea, and was far from making a formal decision.
But one thing became clear: Wall Street seemed to like it. Comcast shares surged when the market opened, and closed up 4 percent on an otherwise down day for Wall Street. And Comcast’s news seemed to make waves across the entire industry, with Warner Bros. Discovery shares also surging, and Disney and Paramount also inching up. In fact, on a day when almost the entire market was down, the media and telecom segments were up.
A spinoff “would be a very welcome development,” wrote MoffettNathanson analyst Craig Moffett on Oct. 31. “Investors have yearned for exactly this, or at least something close to it, for years.”
Why the enthusiasm? Comcast — which has a larger exposure to the cable TV business and subsequently lost more pay-TV subscribers than its rivals over the past year — may be a harbinger of the future, a world where the many disparate cable channels, now unwelcome to the balance sheets of the companies that own them, could find a home where they are the center of attention, and would have more freedom and flexibility to make strategic moves.
Perhaps most significantly, a spinoff company could become a land of misfit networks, a place where unwanted cable channels could find a place to belong, or at least strength in numbers. Paramount Global, for example, has a slew of well-known cable brands like MTV, Comedy Central and Nickelodeon, but the incoming owner Skydance appears to be laser-focused on streaming and broadcast.
Warner Bros. Discovery has a strong cable portfolio that includes TBS, TNT, CNN, Food Network, HGTV and Cartoon Network, but had to take a more than $9 billion impairment charge connected to its channels as their value declined.
And there remain independent cable-centric companies, attempting to navigate the waters as best they can, who may find joining with a larger firm benefits them. AMC Networks, which owns AMC, IFC and BBC America is one, A+E Networks (jointly owned by Disney and Hearst) is another, with A&E, History and Lifetime among its brands. Hallmark Channel, owned by the greeting card giant, is also a major independent player.
Only Disney — which had floated the possibility of pursuing some sort of moves with its linear channels last year before backing off — appears out of the mix.
No one on Wall Street has been more open about the need to consolidate in cable than Bank of America analyst Jessica Reif Ehrlich, who has floated the idea for some time. “The biggest surprise is Comcast beat WBD to the punch, although we believe a spinout could be a cable network consolidator (our view is this will ultimately happen for the industry),” she wrote in an analyst note Nov. 1.
Indeed, Reif Ehrlich told The Hollywood Reporter in an interview after WBD’s disastrous Q2 earnings that a roll up of cable channels would provide ample opportunities.
“Somebody will separate their linear assets, and somebody will roll them up,” Reif Ehrlich said at the time. “We have all these — call them stranded cable networks — maybe part of bigger companies, but not an area of investment, not an area of growth. And so if you combine a lot of the cable networks, I think you get rid of corporate overhead. You can get rid of duplicative advertising functions, distribution, there’s a lot of costs by combining. A roll up could be run for cash.”
A consolidated cable channel company could also provide leverage in the increasingly bitter and acrimonious carriage disputes between pay-TV providers.
There are complexifiers, of course. A big one for Comcast’s plan involves CNBC and MSNBC. While CNBC has historically been run as its own news organization, completely separated from NBC News, MSNBC has long leaned on NBC reporting a a complement to its opinion shows.
If the spinoff goes through, MSNBC may need to build out its own news organization, cut some sort of deal to continue using NBC News resources, or abandon newsgathering altogether to focus on opinion.(Similarly, the Wall Street Journal reported that Bravo could stay a part of Comcast, citing the success of its programming on Peacock.)
Beyond that, the deal involves a slew of unknowns. How does one value a declining asset like this? How much freedom will a spinoff have? And would such a deal be able to extend the lifespan of cable TV? Or is its rapid decline inexorable?
They are real questions, and Wall Street seems to think that Comcast will figure out the answers.
“The review is in early stages and the company is unlikely to provide an update in the near-term but we anticipate the company can find ways to generate incremental value from a spin-out such as cost synergies and/or an extended lifespan should the separate entity combine/partner with other cable networks,” wrote JPMorgan analyst Sebastiano Petti Nov. 1. “Given the challenges in the PayTV ecosystem, particularly cable networks, the standalone attractiveness of these assets is unclear from an investor perspective.”