In its latest move to prioritize and generate value for shareholders, the management team of Comcast (CMCSA) really showed AT & T (T) how to reach an agreement. In its last maneuver, the company reached a multifaceted agreement with The Walt Disney company (DIS) by which Comcast will be discharged from its Hulu stake on time so that it can generate cash in the future for its shareholders. Although I remain convinced that the biggest winner here is Disney, since it will end up with full control over Hulu, the transaction initiated by Comcast is at least more aligned with the interests of shareholders than AT & T and creates the opportunity for a significant increase. if everything goes fine
A look at the transaction.
With the release of ESPN + and the rise of Disney +, it's no secret that Disney is bent on mastering the broadcast space as much as possible. The participation of the entertainment giant in Hulu, adjusted for the purchase of H & U in the company by Hulu, will increase to 66.7%, which will give control to Disney, effectively, through three streaming services, two niches and a wide scope that already has a massive appeal. During the first days of the transmission, when the companies are still trying to establish themselves and with only two main actors (Netflix (NFLX) and Hulu), Disney decided to plunge into this space, probably hoping that, over time, it could be the player to turn to (in addition to Netflix) when people talk about space.
To maximize their chances of achieving this coveted status, the management team agreed to enter into an innovative put / call agreement with the sole remaining owner of Hulu, Comcast, for which, over the next few years, Disney is essentially guaranteed to acquire the contract. of the company. Third participation in the firm. Unlike the case of AT & T, where Disney bought the company's property for $ 1.43 billion in cash today (valuing Hulu at $ 15 billion), Comcast was able to negotiate something a little more interesting that, in the long run, it should create an added value for its own shareholders.
With immediate effect, Disney will assume full operational control over Hulu. As part of the agreement here, Comcast has been granted a position that grants it the right to force Disney to buy its 33% ownership in Hulu at any time beginning January 2024. The Disney, meanwhile, received a call by which right to acquire Comcast's shares in Hulu at the same time (so either party can force a transaction). Unlike the sale of AT & T, which forced a value assigned at the time of sale, in 2024 an independent expert will estimate Hulu's fair value and Comcast will be paid its pro rata share of that value.
However, to protect its own interests, Comcast has also negotiated a floor in the company's valuation of $ 27.5 billion, almost double what the AT & T valuation has assumed. So even if the business goes south, Comcast will find itself isolated from any pain on that front. In total, the implicit income in the floor that Comcast will take will come to just under $ 980 billion. If AT & T had reached a similar agreement, it would have been guaranteed a floor of $ 2.62 billion, but certain compensations such as opportunity costs and interest savings associated with debt reduction would have to be compared to see if the Expecting the guaranteed minimum would be worth it. . That said, with Comcast's debt / equity ratio today at 1.39, while its net leverage ratio is a high but not disastrous 3.50, the company does not seem to be struggling to get cash, so it expects its value increase from $ 4.95 billion to At least $ 9.08 billion seems sensible.
There is another caveat here where Comcast could wind up moving away with a smaller piece of cake. You see, every year, the owners in Hulu must fund any cash shortfalls for the company and Disney, earlier this year, said 2019 should be the worst, with a deficit of $ 1.5 billion in an operational base. As part of the agreement, Comcast has been granted a suspension of these obligations if it so wishes, but in exchange for not having to distribute its share of the cash, Hulu will issue assets of up to $ 1.5 billion per year (probably for Disney ). ) to cover any deficit. This, in turn, will lead to dilution by Comcast. It is very important to mention here that any deficit for capital purposes will be limited to $ 1.5 billion per year, which means that any excess loss must be covered by the debt issued by Hulu. Even if capital is issued each year, the agreement between the companies stipulates that Comcast ownership will not fall below the 21% threshold, guaranteeing that at least $ 5.78 billion will reach 2024.
The final component of this agreement that was made public focuses on Comcast and its content. According to the press release that covers all of this, Comcast agreed that the NBCUniversal content currently on Hulu, as well as the content of Hulu Live and the NBCUniversal channels on Hulu, will remain in place until & # 39; end of & # 39; 2024. During this time period, it is expected that Hulu will also be distributed on Comcast's Xfinity X1 platform. That said, it seems that part of the content will end in 3 years and that in 1 year Comcast may put part of its exclusive content of Hulu in its own OTT services, but in exchange for this, the company will be forced to lower the fees charged Hulu for (from a public perspective) an unspecified amount.
Although all this is much to summarize, my general idea here is that it is a good benefit for both companies, but particularly for Disney, since it will have absolute control and ownership over Hulu within a few years. Meanwhile, Comcast will benefit from the growth that the platform will generate in the coming years in the form of receiving a payment in the future that is much larger than what it would likely see today (as evidenced by the sale of AT & T).
To take away
At this time, investors in both Disney and Comcast should be happy with this development, while AT & T investors should probably be disappointed. The sale of your Hulu participation period was a mistake, but if you need or want to sell, the type of transaction negotiated by Comcast is the way forward. Although many will not agree with my claim that Disney is the biggest winner, in the end I do not see anyone getting away from this better than it will be.
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Revelation: I / we do not have positions in any of the actions mentioned, and we have no plans to start any position within the next 72 hours. I wrote this article myself, and expressed my own opinions. I am not receiving compensation for it (except for part of Seeking Alpha). I have no business relationship with any company whose actions are mentioned in this article.