Comcast deal a prequel to AT&T-Time Warner

A multibillion-dollar bid for a company in a deal that could reshape the media sector faces months of regulatory scrutiny: Brian Roberts probably knows how Randall Stephenson, his opposite number at AT&T, feels this week. 

Seven years ago the Comcast chief executive agreed to buy 51 per cent of NBCUniversal from GE, in a complex deal that valued the media company at about $30bn. Regulators approved the purchase in 2011; two years later, Comcast acquired the rest of the shares it did not own. 

It is unclear if the Comcast-NBCU purchase inspired AT&T to target Time Warner with an $85.4bn deal. But Comcast’s integration with NBCU over the past seven years should give Mr Stephenson an indication of what could lie ahead if his deal is cleared by regulators. 

Comcast’s timing was impeccable. It struck the deal to buy NBCU in October 2009, at a low point in the economic cycle, when the NBC broadcast network and other businesses were underperforming. Time Warner shares at the time were trading around $28 — rather less than the $107.50 AT&T has agreed to pay. 

Craig Moffett, an analyst with MoffettNathanson estimates the NBCU deal was struck at less than nine times earnings. AT&T’s proposed acquisition of Time Warner, by contrast, was struck at 12 times earnings. “The lesson is that timing is everything,” he says. “If diversification strategy requires you to buy low and sell high, AT&T have bought high. Comcast bought low.” 

There were few obvious synergies between Comcast and NBCU when the deal was struck and Mr Moffett says that remains true today. Comcast is not allowed to distribute NBCUniversal content exclusively to sell cable or broadband subscriptions, because antitrust rules require it to make the programming available to other distributors under licence. 

Still, Comcast has learnt that owning a media company can yield other benefits. Investments by Comcast have revived the NBC broadcast network, which in 2009 was languishing in fourth place behind CBS, ABC and Fox. The Universal movie studio was struggling when Comcast bought the company, but it too has been turned around: 2015 was its best ever year, with hits such as Jurassic World and Fast and Furious 7 both hitting $1.5bn at the global box office. 

The biggest turnround was at Universal’s theme parks in Orlando and Los Angeles, which in 2009 were languishing after years of under-investment. As the US economy began to recover, the parks bounced back, propelled by the opening of a Harry Potter attraction in Orlando six years ago, which broke new records for attendance. 

NBC’s own divisions have been integrated more efficiently under Comcast’s ownership. New attractions based on Universal intellectual property, such as the Minions, have been added to the parks. Films have also been better promoted across the broadcast network and cable channels. 

Owning NBC has helped Comcast “innovate a lot faster than some of their peers”, says Amy Yong, an analyst with Macquarie Securities. NBC collects its own data, which Comcast has been able to use to its advantage, she says — pointing to falling rates of customer churn. “They have the data that tells them what people want. They have reduced churn for several consecutive quarters.” 

NBC’s rights to the Olympic Games have also boosted Comcast’s cable and broadband services. Comcast customers were able to choose from 6,000 hours of live television and online streaming coverage, searchable through a voice remote. 

NBC content has also helped Comcast launch new services, without having to wait for comprehensive sets of licences from other providers. When it began selling films to own, over its X1 cable platform, it initially used Universal titles and, with other studios added quickly, it became one of America’s biggest film retailers. Jeff Bewkes, Time Warner’s chief executive, told the FT this week that AT&T would be able to create new services using Time Warner content as an “anchor tenant”. 

Still, AT&T should not expect to generate big synergies between Time Warner’s content and its mobile or broadband distribution, according to Mr Moffett. “Comcast’s strategy from the beginning wasn’t: let’s maximise synergies,” says Mr Moffett. “It was: let’s buy an attractive asset and run it better.” The synergies between content and theme parks have been “real”, he says. “The synergies between content and physical distribution, outside of some modest cross promotion — which could easily be acquired at arm’s length — haven’t”. 

He believes the AT&T-Time Warner deal should be seen as a diversification play: the acquisition of what he says are “inarguably wonderful assets”. Diversification depends on whether an attractive price was paid “and we won’t know for years whether it was good or bad”. 

Regulators approved the Comcast-NBCU deal in 2011. The management teams of AT&T and Time Warner are banking on its clearance then smoothing the path for their own transaction. 

But not everyone thinks the approval of Comcast-NBCU is necessarily good news for the AT&T-Time Warner acquisition. The first deal “often makes it through the door because it doesn't necessarily herald widespread consolidation,” says Erik Gordon, a professor at the University of Michigan Ross School of Business. “Later deals that look like a consolidation trend have tougher times.” 

Mark Patterson, a professor at Fordham Law School, says it is “hard to draw any conclusions today about the likely treatment of media mergers based on the past”. He points to the rapid evolution of media markets and the emergence of digital services that have reduced the power of companies that control access to the internet. “It is not very clear any longer how market power should be measured,” he said. “We may need new methods to evaluate mergers like this one.”