Recommendation for Comcast | Board Of Directors
Discussion Materials | January 22, 2023
DealTeam Deal Team
Matt Penrose
Kelley School of Business, 2026
Major: Finance and Business Analytics
Hometown: Naperville, IL
Luc Boesch-Powers
Kelley School of Business, 2026
Major: Accounting and Finance
Hometown: Boston, MA
I. Executive Summary 4-5 II. Company Overview 6-8 III. Macroeconomic & Industry Overview 9-11 IV. Strategic Recommendation 12-13 V. Valuation 14-18 VI. Strategic Alternatives 19-21 VII. Appendix 22-26
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I. Executive Summary
Executive Summary
● Comcast Corporation is a multinational telecommunications conglomerate that focuses on cable television, internet providing, entertainment, and communication products and services
Overview
● Comcast is the second largest broadcasting and cable television company in the world by revenue and the largest cable TV company in the United States
● Comcast has steadily growth over the past several decades, including through acquisitions. However, concerns over the company’s strategy in direct-to-consumer streaming have caused its stock to fall nearly 30% in the past year.
Scope of Proposal
● This proposal will cover the streaming and telecommunications industry segment
● Comcast’s position as a major corporation in the telecommunications, streaming, and cable industry puts it in a great position to leverage the assets of Warner Bros Discovery for a huge expansion and shareholder value appreciation
● The proposal will cover a variety of specialities, including television, streaming, film studio, and much more
Strategic Assessment Proposal
● Comcast’s strong cash flows from its cable communications, content licensing and broadcast TV segments allow for the acquisition of Warner Bros Discovery to increase its market share in streaming and improve its profitability
● NBCUniversal has created a robust content ecosystem that now includes theme parks and its Peacock streaming service; the intellectual property of Warner Bros Discovery will complement these existing offerings
● A combined Peacock-HBO Max-Discovery+ streaming service would become a must-subscribe for American households, akin to Disney+ or Netflix
Given the opportunity to build a world-class content ecosystem, FIR recommends the acquisition of Warner Bros. Discovery at an offer price of $16.00 per share at an implied equity offer price of $38.85 billion, funded with $4 billion in cash, $8 billion in term loans, and the remainder with equity.
II. Company Overview
Comcast Corporation (NASDAQ : CMCSA)
Background Growth Prospects
● Comcast was founded in 1963 as a small cable system, and later was renamed and formed as Comcast
● Comcast is headquartered in Philadelphia and its CEO is Brian Roberts
● Comcast derives a majority of its growth via acquisition, starting as a small cable company and growing into a massive conglomerate today through numerous acquisitions of companies in similar industries
● International Expansion - Comcast acquired Sky Group in 2018. Sky Group is a British telecommunications and media giant, which positions Comcast to grow into new markets internationally
● Growth of Streaming Platforms -Comcast owns the streaming platform Peacock, which has 18 million subscribers, growing substantially with sights to grow even more in the future
● Technological Advancements - Over the past 2 years Comcast has began to invest in growth and technology infrastructure; one example is offering cloud computing services to business clients
Stock Performance Revenue Breakdown by Channel
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Warner Bros Discovery (NASDAQ : WBD)
Background Growth Prospects
● Warner Bros Discovery was formed in 2022 by a spin off merger between the WarnerMedia division of AT&T and Discovery
● Warner Bros Discovery is headquartered in New York City and has 9 different business segments
● Warner Bros Discovery controls Warner Bros film studios, DC Entertainment, HBO, Discovery, CNN, and many other cable networks
● Consolidation of Acquisition - When WarnerMedia and Discovery merged, there became multiple opportunities for consolidation. These opportunities included decreased headcount, and consolidation of streaming platforms Discovery+ and HBO Max into one offering
● Expansion of Movie Creation - The movie studio Warner Bros Film Studio has the opportunity to capitalize on the merger due to higher budgets and exposure
Stock Performance Revenue Breakdown by Channel
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III. Macroeconomic & Industry Overview
Macroeconomic Analysis
● US Real GDP declined 1.4% in Q1 of 2022, 0.6% in Q2, and increased 3.2% in Q3
Outlook
● The Personal Consumption Expenditure Price Index increased 5.5% in November 2022
● In 2021, 54% of Americans use streaming services on a TV and 36% of Americans use streaming services on a personal device
Trends
● Inflation has been rapidly increasing, and prices for many services are currently skyrocketing in many different industries; however, inflation has fallen 6.5% from previous highs above 7%
● Personal debt in the US is increasing heavily, rising 4.0% from 2020 to 2021
● The US economy is recovering, and majority of analysts expect a 0.5-1% increase in Real GDP in 2023
Opportunities
● The streaming market is ripe for consolidation because there are many players in the industry, including Amazon Prime, HBO Max, Disney Plus, and many more - which could be an opportunity to consolidate these services for a higher price point and market power
● There is an opportunity for a massive consolidation of different industries, leveraging telecommunications and streaming services for higher profits
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Industry Overview & Analysis
Streaming Market Size, Revenue, and Share
● The global video streaming market is estimated to be worth nearly 60 billion USD as of 2021, with projections to grow to 750 billion USD by 2031
● In 2022, the video streaming service industry had revenues of 52 billion
● The largest companies by market share are Netflix (30%), Alphabet Inc. (24%), and Disney (20%)
Industry Trends - FIR Thesis
● Before the onset of DTC streaming, US households spent an average of $84 per month on Cable TV for video entertainment
● The heightened competition in DTC streaming lowered prices to $54 per month for households
● The forthcoming “great rebundling”, where the streaming industry consolidates and matures, will allow for a reversion to the mean in terms of pricing
Industry Outlook (2022-2027)
IV. Strategic Recommendation
Strategic Recommendation
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● Comcast’s leadership team will remain, and many WBD executives will take positions in the larger company, cutting leadership and staff costs when possible
Strategy
● Warner Bros Discovery has many different services that can be combined and merged with Comcast to lever higher growth, lower costs, and better organizational structure
● Comcast’s subsidiary NBC Universal owns the rights to Sunday Night Football, which can be used exclusively on HBO Max, which would bring in an estimated 5-18 million more customers
● Establish integrated services between Xfinity Cable TV and the combined HBO Max, Discovery and Peacock streaming service, raising prices and increasing revenue substantially
Synergies
● Cost: Comcast acquiring Warner Bros Discovery Inc. will result in potential for significant headcount reductions because of overlap in television, motion picture, and technology segments
● Revenue: Combining streaming services could lead to more customers at a higher ARPU because the combined offering would have a greater quantity of sought-after content. The combined company would also have the ability to license a greater amount of less popular content to AVOD services.
● Intellectual Property: There is a massive opportunity to integrate Warner Bros, HBO, and Discovery content at Universal theme parks and across other channels. Although the quality of Disney’s IP is second to none, the sheer quantity of WBD and NBCUniversal IP could create a formidable Disney challenger.
Potential Concerns
● Antitrust: This acquisition may attract regulatory scrutiny, especially with respect to sports networks
● Culture Misalignment: Potential issues and clashes between the cultures of WBD and CMCSA
V. Valuation
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Discounted Cash Flow Analysis (Part 1)
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Discounted Cash Flow Analysis (Part 2)
Comparable Valuation 52 Week Trading Range Analyst Forecasts Implied Share Price $8.82 $31.12 $8.08 $32.00 $14.79 $20.62 $15.52 $42.29 10 15 20 25 30 35 40 45
Table of ContentsFootball Field Analysis
VI. Strategic Alternatives
Strategic Alternatives
Financial Fit
Strategic Fit
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Strategic Alternatives
● Formed in 2006, and is primarily is an on-demand streaming service for Japanese animation, also known as “anime”
● Available worldwide and has the largest streaming catalog of licensed anime
● Owned by Sony, and has an estimated 5 million subscribers and 120 million active users
● Risks and Issues:
○ Crunchyroll is a strictly anime streaming service, which is currently not a culture fit with Comcast’s streaming platforms
○ Many major titles found on the platform can be found on other streaming services as well
● The company is owned by National Amusements, and was formed in 2019 under the name ViacomCBS Inc, and rebranded into Paramount Global in 2022
● The company owns Paramount Pictures film and TV studio, CBS entertainment studio, various media networks, and Paramount+
● Paramount+ has an estimated 45 million subscribers with blockbuster programs such as Star Trek
● Risks and Issues:
○ The overreliance on the sci-fi audience
○ Paramount+ has limited popular content, with only a couple major shows and movies
● Launched in 2006 by Amazon as Amazon Unbox, the service quickly grew and added membership once Prime was developed; launched worldwide in 2016
● The service primarily has content created by Amazon Studios or MGM Holdings, but also offers various movies and shows produced by outside studios, usually for a rental fee
● Prime Video has millions of subscribers worldwide, as Prime members get access to Prime Video
● Risks and Issues:
○ Will be an extremely expensive deal, that is most likely out of the scope of Comcast’s budget
○ Prime Video is interconnected with Prime services, which will be an issue integrating into Comcast
VII. Appendix
Table of ContentsAppendix I: Streaming Industry Trends
Table of ContentsAppendix II: Combined Content Ecosystem of Both Companies
Appendix IV: Firm Value Sensitivity Analysis
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