Upgrading to Buy: Spin-Off Unlocks Value

Research evidence excerpt

Upgrading to Buy: Spin-Off Unlocks Value

ing the

amount of work that needs to be done to carve out the businesses, produce

audited pro-forma financial statements/disclosures, and build out

functional areas needed to support a second independent company. The

transaction requires SEC approval, while any other regulator approvals

(e.g., FCC) are minimal and more procedural in nature. We'd also note that

the Versant spin-off took almost a year to complete and, while the

experience of separating Versant might make this second split go a bit

faster all else equal, this separation is also greater in scale with significant

multinational elements.

n Leverage: Management has not provided guidance on leverage yet. We

believe the decision on how much leverage to put on each of the new

companies will largely be a function of what the debt rating agencies will

require for investment grade credit ratings on both companies. Our SOTP

analysis assumes that New Comcast (i.e., Cable) will be levered at 2.2x net

debt/EBITDA at YE2027, or 2.0x assuming the application of proceeds from

selling the 19.9% retained stake in NBCU. This would leave NBCU levered

at 1.2x at YE2027.

n Pro-forma financials are in flux, and will be for a while. We've made the

simple assumption that Comcast's Corporate level EBITDA loss of about

$1.2B will be split evenly between the two new companies. While new

functions will have to be created in some cases, we expect the costs of

these new functions to be fully offset by eliminating corporate level support

costs for the business segments. RSNs are reported in Corporate and the

company hasn't yet determined where these will end up; Comcast has been

exiting and closing various RSNs, so there might not be any left by the time

the spin-off is completed.