Excellent writeup of the key parts to the UMG/CMCSK combination.
DCR Comments on the Merger of
Comcast and MediaOne
CHICAGO, March 24 /PRNewswire/ -- Comcast Corp.
(Comcast) and MediaOne Group, Inc. (MediaOne) recently announced that they had entered into a
definitive agreement to merge. Duff & Phelps Credit Rating Co. (DCR) currently rates Comcast's
senior subordinated debt 'BBB-' (Triple-B-Minus) and its recently issued PHONES 'BB+'
(Double-B-Plus). Likewise, DCR has a senior unsecured rating of 'BBB-' (Triple-B-Minus) on
Comcast Cable Communications (Comcast Cable). DCR has a senior rating of 'BBB' (Triple-B) on
MediaOne Group, MediaOne of Delaware and MediaOne Group Funding. DCR also has a TOPrS
rating of 'BBB-' (Triple-B-Minus) for MediaOne Finance Trusts. All these ratings will be reviewed,
as more information is available from the companies. However, DCR views the merger as a positive
credit event for both companies.
DCR recognizes the revenue and cost synergies that can be obtained from the combined larger
company. The key revenue synergies focus around the greater customer base that can drive
advertising revenue potential as well as a complementary product portfolio. Key cost synergies will
include improvements in programming rates as well as typical clustering efficiencies related to call
center consolidation, inventory warehousing, marketing, advertising and billing. Likewise, the
combined company will be able to reduce corporate expenses where there are redundancies. The
company has indicated that an early estimation of these synergies could result in approximately
$500-635 million of additional EBITDA annually after the completion of the merger. The combined
company will also have a subscriber base of approximately 11 million and pass approximately 18
million homes which would position it as nearly the same size as Time Warner and AT&T, which is
the largest of the cable companies in the industry.
Another key benefit is the amount of outstanding marketable securities and the potential for
additional cash from non-core asset sales. The combined company will have significant non-core
equity positions in AirTouch, Sprint PCS, AT&T and NTL that would represent a market value of
more than $7.5 billion. If outstanding cash and MediaOne's expected TWE distribution is combined
into this total, the companies will have more than $9 billion of non-core marketable securities and
cash available for investment or other purposes prior to the sale of any international assets. It is
expected that international non-core asset sales could have a value of more than $7 billion. In total,
the combined company will be well funded to pursue other growth investments in broadband.
From a new service perspective, the merger entity will have leading customer totals in high-speed
data access, enhanced analog/digital cable and telephony. The growth prospects from these services
are good which should lead to increased revenue growth and ultimately higher EBITDA levels for
the company. Other assets that are very strategic to this combination are MediaOne's Telewest and
TWE ownerships, and Comcast's controlling stake in QVC's operations. MediaOne owns 25.51
percent of the equity of TWE and 29.9 percent of Telewest. Telewest is a leading broadband
company in the UK that provides telephony and pay television. Telewest produces material levels of
EBITDA and is growing rapidly. TWE has approximately 10 million subscribers and MediaOne's
equity stake also includes the operations of Home Box Office (HBO), which is the largest source of
pay television programming with more than 23 million subscribers. This programming position
complements Comcast's E! Entertainment and Comcast-Spectacor interests. QVC is the leading
provider of electronic retailing that continues to grow rapidly and produce strong results both
domestically and internationally. QVC's largest market presence is in the United States, UK and
Germany.
Prior to any rating action, DCR will meet with management to receive more information from the
company on placement of the merged operations within the existing Comcast subsidiary structure as
well as financial and investment expectations. Nevertheless, DCR views this merger positively and
believes that it will have a strong domestic and international market position and good long-term
financial prospects.
MediaOne Group provides cable television services to approximately 5 million customers and its
networks pass approximately 8.5 million homes. The company has ownership stakes in TWE, and
various international ventures most notably UK cable operator Telewest and UK wireless operator
One 2 One.
Pro forma for its acquisitions, excluding MediaOne, Comcast has approximately 6 million customers
and passes more than 9 million homes. Comcast owns a controlling stake in QVC, a leading
provider of electronic retailing; E! Entertainment, a cable programming provider; and
Comcast-Spectacor, a regional sports programmer.
Related research material on the companies can be accessed on DCR's web site at
dcrco.com under Telecommunications\Credit Analysis.
SOURCE: Duff & Phelps Credit Rating Co.
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