EUR 850.00 For Business Accounts Only

Morningstar | Comcast’s Sky Acquisition Doesn’t Tarnish Our View of the Firm

Comcast’s core cable networks have provided a significant competitive advantage versus its primary competitors, phone companies like AT&T and Verizon, as high-quality Internet access has become as staple utility in more households. The firm’s market share has steadily expanded in recent years, driving cash flow sharply higher. In addition, the decision to acquire NBC Universal has added shareholder value, in our view, through a combination of a reasonable purchase price and strong execution. In short, we believe Comcast has built a solid wide moat firm. Not content to merely return cash to shareholders, however, management has chosen to invest $40 billion, or a bit more than three years’ worth of free cash flow, to acquire Sky, the largest pay television provider in Europe. We expect Sky and NBCU will enhance each other’s competitive position, but Comcast paid a very high price that we think will limit value creation. Still, we believe any concern that Comcast management has lost its touch or that changing television viewing habits will hurt the business are more likely to provide investors with buying opportunities than to reflect economic reality.Even with the additions of NBCU and Sky, we expect the core cable segment, especially Internet access, will remain Comcast’s most important business. Over the past five years, we estimate the firm has increased Internet access market share in the areas it serves from about 55% to 62%, with share coming nearly entirely from the phone companies. While that share shift may seem modest, it implies that Comcast’s customer base in a given area is now more than 60% larger on average than its rivals’, up from around 20%. In areas where the phone companies haven’t invested in network upgrades, we suspect the gap is significantly larger still. With a network than can be upgraded at modest incremental cost, we expect Internet access share will continue to shift in Comcast’s favor, enabling the firm to gain additional scale efficiencies. The high-margins on Internet access should offset the decline in the traditional television business, where margins have already plunged in recent years.