With tongue only partially in cheek, Sanford Bernstein cable and satellite analyst Craig Moffett recently wrote in a firm publication that Comcast could oust public stockholders and take the company private with almost no money down. With borrowing power up to 8.5 times cash flow of nearly $12 billion, Comcast could add another $72 billion in debt to its $30 billion load without worry. We asked Moffett about the genesis of his statement.
Is the leveraged buyout [LBO] scenario you laid out a real possibility, or was it just an exercise in demonstrating how cheap the shares of Comcast and other cable operators are in this market?
Craig Moffett: We didn’t write the piece to suggest that we thought Comcast actually would go private. We wrote the piece to illustrate just how wide the disconnect between public market and private market values has become for cable. The notion that Comcast could do an LBO, just by virtue of its sheer size, raises eyebrows. But the stock is cheap enough that the numbers work and result in potentially spectacular equity returns.
Might there be some tactical or strategic reasons for Brian Roberts to take the company private?
Moffett: Well, putting your name on top of the Forbes‘ list of wealthiest people in the world isn’t a bad place to start. But Comcast’s ability to go private is driven by four things. No. 1, the business is generating significant free cash flow, and that means it can service a significant amount of debt. No. 2, EBITDA [earnings before interest, taxes, depreciation and amortization] growth is significantly higher than the cost of debt, and that means that the business is organically de-levering every day. No. 3, Comcast is now a cash taxpayer, so there is now real value in the interest tax shield. And No. 4, the stock is dirt cheap. With that combination of four things, an LBO looks eminently feasible.
Any other reasons to either remain public or go private?
Moffett: One of the pieces of conventional wisdom that gets thrown around is that cable companies go private because they know the market doesn’t want them to spend capital, and so they go private in order to exit the public eye. That line of thinking is sheer idiocy. That is essentially a suggestion that cable entrepreneurs want to go private in order to ensure that they can buy high and sell low. It assumes that cable entrepreneurs want to make sure that they buy the stock before it goes down. Just on its face, idiotic.
You mentioned that Time Warner Cable also has potential “value creation” latent in its balance sheet. Are there other cable operators with the potential to go private?
Moffett: This shouldn’t be assumed to be unique to Comcast. It’s the nature of where we are in cable. We’re exiting two consecutive capital spending cycles that have required massive reinvestment for 15 years: First came the plant upgrade, then came all of the equipment at the edge of the plant. As we come to the end of that double cycle, the amount of capital required to support the business falls dramatically. And it’s no coincidence that the two companies that are furthest along chronologically, Cox and Cablevision, are either already private or are on their way.
What impact does this balance-sheet flexibility at Comcast and other large MSOs have on the potential for further industry consolidation?
Moffett: I don’t know that it really changes anything with respect to smaller companies or with merger and consolidation scenarios. And again, I want to emphasize that I don’t think it’s likely that Comcast is going to go private. I only think it would be possible to do the deal. But I think these kind of cash-flow dynamics aren’t unique to Comcast.
Might that make smaller operators less eager to try and cash out if they see the same long-term prospects that you do?
Moffett: Potentially, though as the industry gets more concentrated it’s harder and harder for the very small players to hold their own with respect to retransmission consent and programming costs. That’s undoubtedly a significant driver of the thinking at Insight right now. Now that they’ve unwound the Comcast partnership—and they lose the benefit of Comcast purchase leverage—it’s less appealing to remain independent.
Rob Garretson is a business and technology writer based in Gaithersburg, Md.