Comcast, Disney merger could be a disaster
By Kenneth Li
NEW YORK, Feb 12 (Reuters) - Cable television operator Comcast Corp.'s (nasdaq: CMCSA - news - people) surprise bid to buy Walt Disney Co. (nyse: CMCSA - news - people) raises doubts about the intrinsic value of mixing programming and distribution, something that has rarely succeeded in the past.
The bid invited comparisons with the ill-fated America Online and Time Warner Inc. (nyse: TWX - news - people) merger three years ago, and Time Warner's pursuit and acquisition of cable properties in the 1990s. It also dredged up stinging reminders of Sony Corp.'s <6758.T> 1989 $5 billion gamble on the purchase of Columbia and TriStar movie studios in hopes of selling more TVs and VCRs, only to write down billions of losses in less than five years.
"The experience is it has not necessarily been beneficial," said Tom Wolzien, media analyst at Sanford C. Bernstein in New York. "We haven't seen synergies work between Time Warner content and cable. Why is it going to work here?"
Yet, not since the 2000 announcement of the AOL and Time Warner merger have some been so enthusiastic.
"It's an amazingly brilliant combination,"Jessica Reif Cohen of Merrill Lynch, a global media analyst, said in a conference call with executives on Wednesday. "This combination makes perfect sense."
But by the end of the day, media experts were drawing more comparisons with Time Warner's missteps, including what has become a bit of a dirty word in the industry -- synergy.
"I am generally not a big fan of that," said Gerald Faulhaber, a professor of business and public policy at the Wharton School at the University of Pennsylvania.
"We've seen it happen years ago when Time Warner (bought) a bunch of cable properties. They haven't screwed up, but they haven't created much benefit either," said Faulhaber, a former chief economist at the Federal Communications Commission.
More recently, stewards of the AOL and Time Warner merger -- built on the notion the Internet could be a profitable pipeline for Looney Tunes, People magazine and Warner Bros. films -- watched $200 billion in shareholder value evaporate. And the AOL service has barely found its way into Time Warner Cable homes.
The lingering memory of AOL Time Warner's problems is now casting a shadow over Comcast's chances for success.
"Our fears ... are rooted in the long history of failed vertical-integration transactions, particularly those that have focused on combining content and technology as this one does," said Richard Greenfield, an analyst at Fulcrum Global Partners, who dropped Comcast's rating to neutral from buy, and raised Disney to neutral from sell.
Indeed, supporters of the concept view Rupert Murdoch's News Corp. and Viacom (nyse: VIAb - news - people) as icons of media consolidation, although News Corp. has yet to face its true test of synergy between content and distribution, almost six weeks after completing the DirecTV purchase.
"The jury's out on DirecTV and the verticalization of News Corp.," said Craig Moffett, cable analyst at Sanford C. Bernstein.
POST MORTEM
Supporters say Comcast, which earned a reputation for turning around clunkers like AT&T's cable systems, will make a go of it.
Comcast executives see up to $1.2 billion in incremental cashflow within three years through cost cuts, shrewd management and the ability to create new assets from owning Disney.
"It all comes down to execution," said Brian Roberts, Chief Executive Officer of Comcast, in an interview with Reuters.
Even detractors see possibilities.
"There are some opportunities for a distributor to add real value to content through negotiating leverage," Moffett said.
News Corp. is expected to be able to negotiate better rates for its Fox News channels and regional sports networks from other cable and satellite operators by virtue of its ownership of DirecTV, which competitors with their own programming networks will also seek distribution on.
But comparisons between Comcast and News Corp. stop there.
Murdoch's leverage from DirecTV, which currently only serves about 10 pct of the pay TV market, is spread across the country, giving his company the ability to extract a negotiating leverage across the remaining 90 percent of the market.
By contrast, while Comcast serves 80 percent of homes within its own markets -- including San Francisco, Philadelphia and Chicago -- it reaches only about 40 percent of the country. That gives Comcast negotiating leverage on about 7 percent of the market it does not yet control.
To be sure, Comcast also said its 30-year track record with turning around troubled cable systems made it a good candidate to turn Disney around.
Some analysts weren't immediately convinced. "What background do they have to be promising a turnaround at the television network .. and motion picture studio?" asks Heather Goodchild, a credit analyst at Standard & Poor's in New York.
"A certain amount of what is being called synergies here refers to assumptions that one guy can run the business better than the other guy, who has done it for a number of years," she said. "That's not really synergies."
"There's nothing unique that Comcast brings to the equation other than the ability to buy it," Craig Moffett said. |
