A Transformative Deal for Both Companies
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
General Electric (NYSE: GE) recently agreed to sell its remaining ownership stake in NBCUniversal to Comcast (NASDAQ: CMCSA). The deal makes sense for both companies, allowing each to continue to change their businesses in important ways.
Comcast will pay $16.7 billion to buy the 49% stake in NBCUniversal that GE still owns. The 2011 deal to sell the media Network to Comcast was a fairly big move for GE, since it had for years benefited from that division's strong market position. However, after flirting with disaster during the 2007 to 2009 recession, GE CEO Jeffrey Immelt has taken a back-to-basics approach to the company.
Since an industrial company owning a media network didn't really fit very well, jettisoning the assets made sense. Finding a buyer for such a large entity in the media world, however, was an issue. When Comcast, which had a dominant position in the cable industry but lacked quality content, came along, it was the right time to simplify GE.
Not a Marriage Made in Heaven
Originally, GE retained a stake in the new media entity, which allowed it to continue to benefit from the success of the unit. However, according to Amy Chozick and Brian Stelter of The New York Times, GE's driven culture didn't mesh well with Comcast's, which is a more “conservative, low-profile” one. So, while the sale was intended to remove a distraction from GE, infighting may have actually resulted in that distraction remaining.
Thus, getting rid of the ownership stake probably makes complete sense. It also gives General Electric a cash infusion at a time when it could use it. That isn't to suggest that the company is on the ropes, only that the company's plan to return the cash to shareholders via stock repurchases looks to be well timed.
Indeed, GE is well off its highs prior to the 2007 to 2009 recession, and still trying to build trust with shareholders. Buying at what looks like a relatively low price point seems to be a good use of cash, and more importantly, will make hitting future earnings numbers that much easier.
Still a Lot to Mend
That said, a lot of trust was destroyed at GE when the company's finance arm was allowed to get too big and diverge too far away from its original purpose (supporting big-ticket sales at the industrial units). The financially led recession proved that the financial division had become too large, since it nearly took the entire company down with it and forced GE to take a government handout to help ensure its solvency. The company's dividend cut in 2009 was the final nail in the coffin.
A more streamlined GE, however, has been turning in much better results. And, more importantly, hitting self imposed targets with greater regularity. Trust is beginning to build again. With the prospect of smaller share counts in the next couple of years, investors should find this newly invigorated industrial giant an interesting option.
Comcast, interestingly, is going the opposite direction and that could be very good, too. The company's cable business already gives it a pipe into customers' homes. What it lacked was compelling content. With the purchase of NBC it got a premier brand in one swift move. That gave it both the pipe into the home and content to send through the pipe.
The cost of content has been increasing because of the aggressive efforts of companies like Netflix to fill out online media services. Owning a massive content creating entity will not only save Comcast money it might have otherwise spent to buy content, but it will also give it a chance to sell content. That should make the deal a winner in the changing media space.
Moreover, with a vast array of cable already in the ground, Comcast has a notable cash cow business going. Once it gets through the final purchase of NBC, it might use the cash from cable to continue to bulk up its media side. Adding more Internet content and services might be one avenue the company considers, since it would give it a strong presence across the entire media space.
Breaking it Down
However, Time Warner (NYSE: TWX) could be an interesting harbinger of the future. A few years ago Time Warner broke off its cable business as a separate company. That move unlocked the value of the company's cable assets and allowed it to focus on its media empire. It was the culmination of the recovery from a very difficult period in which it merged with AOL, clashed with AOL, and spun AOL off to the public.
While the cable business is solid today, online content, like that offered by Netflix and Amazon.com, is making it less and less necessary to pay what many view as overpriced cable bills. Time Warner's decision to get rid of cable when it was still believed to be the best way into a customer's home could prove to be a timely move. The increasing use of mobile web access should be a leading edge concern for the cable companies, since it shifts usage to the cell phone providers and away from what would likely have been cable usage.
While Comcast is only just bulking up its media assets, it could easily find that it likes being a media company far more than it likes being a cable company. As cable feels more pressure from more compellingly priced online content and the increasing use of mobile Internet access, it could also go down the road of a cable spinoff, too.
Both GE and Comcast have a lot of parts moving around right now. This deal could be good for both businesses. In the near term, GE is likely to see the bigger benefit, as it allows management to focus on its industrial businesses and boost share earnings by buying back shares. Comcast is entering a less defined world, but that doesn't mean it won't work out in the long run—even if the company eventually breaks itself apart.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com and Netflix. The Motley Fool owns shares of Amazon.com, General Electric Company, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!