Comcast Could Begin To Unlock NBCU Value With Theme Parks

Comcast's challenge to unlock the value of non-core or declining assets has been thrown into high gear by The Blackstone Group's move to sell its 50% interest in Universal Orlando or flip full ownership of the theme parks and resort to a third party.

This scenario should have played out on General Electric's watch as sole owner of NBC Universal. Anticipation was high following NBC's acquisition of Universal in 2004 that the media company would monetize all of its inherited theme parks.

Then is now. Comcast, the country's largest cable operator and the new owner-distributor of NBC Universal's big-time brand content, has no interest in owning theme parks. It wants only the annuity-like revenue stream generated from 20-year licensed use of its brand characters and content franchises, without the capital or operating costs of these non-strategic assets.

Blackstone has presented Comcast with the opportunity to rethink its entire investment strategy for the theme parks. Sale proceeds could be used to pay down debt or to expand its cable network and content holdings. Here are some of the particulars:



*Comcast has the right of first refusal to buy Blackstone's 50% in Universal Orlando resort properties, which includes Universal Studios Florida, Universal's Islands of adventure and the Wizarding World of Harry Potter theme parks. Barclays analyst James Ratcliffe expects the entity to generate $430 million in earnings in 2011 and estimates its equity value at about $2.6 billion. Comcast NBCU does not currently consolidate its 50% ownership of that entity or the $1.5 billion in related debt on its balance sheet. Whether it buys out Blackstone's interest to convert Universal Orlando into a wholly owned consolidated asset, or sells Universal Orlando outright, the asset monetization would be incrementally positive for Comcast NBCU, Ratcliffe says.

* Universal Orlando is distinct from the Universal Theme Parks, which are 100% owned by NBCU and generated about $175 million in earnings last year. If Comcast does not offer to buy out Blackstone's interest in Universal Orlando, the firm will be free to sell its share -- and potentially force a complete sale of the entity -- to a third party. That could conceivably open the door for Comcast NBCU to also unload all of its consolidated theme park assets, collectively valued at about $1.4 billion.

An obscure consulting arrangement that Steven Spielberg has with Universal Orlando, dating back to the park's 1987 inception and worth roughly $34 million in annual payments to the famed producer (or 2% of overall revenues), might actually be a catalyst for some creative deal-making. Since the arrangement would be part of any Universal Orlando transaction, Comcast could seek to replace or follow the payment pact with a more productive content-related deal with Spielberg that would be valuable to its studio business.

Any form of theme-park monetization will free up funds to reinvest in all forms of content, as well as the cable networks that anchor the newly merged company, generating 80% of overall earnings on just 40% of revenues. The theme parks generate only about 3% of overall revenues and about 5% of earnings for Comcast NBCU, growing only about 3% this year and in 2012 before flattening out to less than 2% annually thereafter, analysts say. Its film operations also generate 5% of earnings, but 24% of revenues. While film operations are cyclical (with revenues forecast to decline 4% this year off of strong 2010 results), it is a significant source of unique content for Comcast NBCU.

Rethinking the theme-park business will make it easier for Comcast to address the future of the NBC Television Network, whose ratings and revenue position continues to deteriorate. The NBC TV Network and NBC-owned TV stations generate 10% of earnings on 32% of revenues. A bold move long suggested by this column would be to spin off the NBC TV Network shell and its dependent NBC-owned TV stations to a major broadcast affiliate group, such as Hearst and Gannett, or to a private equity partner.

Comcast NBCU would continue to own and distribute its branded news and entertainment content to a variety of outlets, including the NBC-affiliated network and stations.

The rationale for action is in the numbers. NBC hasn't recovered from historic ad revenues losses caused by the recession. It continues to wrestle with declining prime-time ratings that will never regain historic highs because of audience diffusion. NBC's overall revenue growth is expected to slide from less than 3% to at least a negative -1% in 2012, analysts say.

Compounding the problem: NBC paying $1.2 billion for the 2012 London Olympics, which will generate an estimated $100 million net loss, but provide a solid platform off which to promote Comcast NBCU networks and content. Should the company pursue the 2014 Sochi, Russia games -- paying in the lower $700 million range -- it would, at best, break even.

While retrans fees paid by cable operators such as Comcast have been a temporary boom for broadcasters, competing over-the-top TV alternatives and regulatory conditions limiting Comcast's ability to charge for NBC programming will minimize that revenue source in the future. Overall, dramatic changes in content access and economics eventually will crush the inefficient broadcast TV network model.

Because it is an irreversible drag on the new company's balance sheet, Comcast will likely be the first among its peers to radically alter or abandon the traditional broadcast network TV business model. While Comcast Chairman and CEO Brian Roberts vowed he had no plans to "Comcast-ize" NBC, he is committed to making --- not losing -- money. The company is expected to generate fully tax-free cash flow of $7.2 billion in 2011, with full-year cable earnings nearing $15 billion and its combined content-related earnings topping $3.5 billion, Ratcliffe estimates.

Chances are by 2014, when Comcast is set to buy half of GE's remaining 49% stake in the $80 billion company at a net cost of about $7.6 billion in debt, it will seek to better monetize its underperforming or modestly performing assets. The transforming media world will have changed just enough by then to fully justify -- even to regulators -- the radical reform or outright sale of NBC.

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