Comcast Corp. opened its latest earnings call with a surprise announcement: The Brian Roberts-led media giant was weighing whether to spin off its cable TV channels into a separate “well-capitalized company” that would “position them to were taking advantage of opportunities in the changing media landscape.”
Was Comcast testing the waters? Of course. Comcast President Mike Cavanagh made it clear that the company was just beginning to consider the idea and was far from making a formal decision.
But one thing became clear: Wall Street seemed to like it. Shares of Comcast rose when the market opened and closed up 4 percent on an otherwise down day for Wall Street. And the Comcast news seemed to send ripples throughout the industry, with shares of Warner Bros. Discovery also growing, and Disney and Paramount are also growing. In fact, on a day when almost the entire market was down, the media and telecom segments were up.
A spinoff “would be a LOT welcome development,” MoffettNathanson analyst Craig Moffett wrote on Oct. 31. “Investors have wanted just this, or at least something close to it, for years.”
Why the enthusiasm? Comcast — which has greater 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 many cable channels different, now unwanted on 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 importantly, a spinoff company could become a place 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 host of popular cable brands like MTV, Comedy Central and Nickelodeon, but incoming owner Skydance seems laser-focused on streaming and streaming.
Warner Bros. Discovery has a strong cable portfolio that includes TBS, TNT, CNN, Food Network, HGTV and Cartoon Network, but it had to take an impairment charge of more than $9 billion tied to its channels after their value declined.
And there remain independent cable-focused companies trying to navigate the waters as best they can, which may see a merger with a larger firm stand to benefit. 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 big independent player.
Only Disney — which had floated the possibility of pursuing some kind of move with its linear channels last year before pulling out — appears out of the mix.
No one on Wall Street has been more outspoken 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 that Comcast beat out WBD in the best spot, although we believe a spinout could be a cable network consolidator (our view is that this will eventually happen for the industry),” she wrote in a note. the analyst on November 1.
Indeed, said Reif Ehrlich The Hollywood Reporter in an interview after WBD’s disastrous second-quarter earnings, that a consolidation of cable channels would offer numerous opportunities.
“Someone will split their linear assets and someone will collect them,” Reif Ehrlich said at the time. “We have all these — we call them stranded cable networks — maybe part of the bigger companies, but not an investment zone, not a growth zone. And so if you combine multiple cable networks, I think you get rid of the corporate overhead. You can get rid of duplicate ad functions, distribution, there are many costs by combining them. A summary can be done for cash.”
A consolidated cable company could also provide leverage in the increasingly bitter and acrimonious disputes between pay TV providers.
Of course there are complications. One big thing about Comcast’s plan is that it includes CNBC and MSNBC. While CNBC has historically been run as its own news organization, completely separate from NBC News, MSNBC has long relied on NBC’s reporting as a complement to its opinion shows.
If the spinoff goes through, MSNBC may need to build its own news organization, make some sort of deal to continue using NBC News’ resources, or abandon newsgathering altogether to focus on opinion. (Similarly, Wall Street Journal reported that Bravo could remain part of Comcast, citing the success of its programming on Peacock.)
Beyond that, the deal involves a host of unknowns. How is a declining asset like this valued? How much freedom will a spinoff have? And will such a deal be able to extend the life of cable TV? Or is its rapid decline inevitable?
Those are real questions, and Wall Street seems to think Comcast will find the answers.
“The review is in the early stages and the company is unlikely to provide an update in the near term, but we anticipate that the company may find ways to generate incremental value from a spin-out, such as cost synergies and/or a extended lifespan if separate entity combines/partners with other cable networks,” wrote JPMorgan analyst Sebastiano Petti. “Given the challenges in the PayTV ecosystem, especially cable networks, the standalone attractiveness of these assets is unclear from an investor’s perspective.”