Trian Investment in Comcast Fuels Debate on Breaking It Up

(Bloomberg) -- The debate over whether Comcast Corp. should break up its business has once again entered the spotlight after corporate agitator Trian Fund Management disclosed a new stake in the company earlier this week.

For years, there’s been a heated debate in the media industry over who can best withstand the disruption brought on by online services like Netflix Inc.: Hollywood studios that produce TV shows and movies, or cable and satellite operators that deliver them to your home?

Brian Roberts, Comcast’s chairman and chief executive officer, believes the answer is both, and he has built Comcast into a cable and entertainment behemoth that straddles both sides of a fast-changing industry.

At a conference last week, he argued that Comcast is poised to prosper as big tech companies get into entertainment, and as media companies try to use new technologies, like streaming and other platforms, to distribute content.

“What’s the center of that regardless of what side you’re coming from?” he said. “It’s broadband and the internet, and broadband is really the enabler. And the best thing for Comcast is, we are there.”

But Wall Street isn’t so sure that Roberts’s strategy makes sense anymore. And it appears that Trian isn’t, either.

The New York investment firm, which was founded by Nelson Peltz, Ed Garden and Peter May, has amassed a stake in Comcast valued at about $917 million, or roughly 0.4% of its outstanding shares, according to a person familiar with the matter. Trian has a long track record of pushing to break up conglomerates like Comcast, having done so at companies ranging from DowDupont Inc. to PepsiCo Inc. in the past. This is its first investment in the telecom-media-technology sector.

Trian and Comcast declined to comment.

Representatives for Trian have already met with Comcast to discuss their views, Trian said in a statement earlier this week. While it’s unclear what sort of changes the investor might be seeking, the idea of separating Comcast’s cable business from its NBCUniversal and Sky media assets isn’t a new one.

‘Ways to Win’

“While we see several ‘ways to win’ for Comcast investors, we believe that a spin-out of NBCU/Sky offers the greatest long-term upside potential,” Peter Supino, an analyst at Bernstein, said in a note to clients this week.

Comcast has risen more than twice as much as the S&P 500 index since 2010. But in the past three years, despite Comcast’s strong results in the cable segment, Supino wrote, the company has underperformed both the S&P 500 and its cable peer Charter Communications Inc. He said that was largely to do with the struggles at NBCUniversal and Sky.

In June, Supino took the unusual step of writing an open letter to Roberts on the topic, arguing a breakup was the sort of “bold move” needed to bolster returns.

“NBCU/Sky’s current paths are neither here nor there. While incrementalism may feel prudent in Comcast’s strong hands, it amounts to the boiling of a frog,” Supino said at the time.

Spinning off the entertainment units as a separate business would immediately see the cable division trade at a higher multiple, Supino said. It would also free the division to invest in capacity, products and subscribers, and bolster share repurchases and dividend growth.

At the same time, the entertainment business would be better able to invest in programming and technology for user interface, personalization, audience data and advertising monetization, and to pursue strategic acquisitions, he said.

Significant Hurdles

To be sure, Trian would face some significant hurdles in pushing for a breakup if it were to pursue one. Roberts and his family control 33% of the voting stock, and any changes would require his approval. Roberts is unlikely to dismantle the conglomerate he built after taking over the Philadelphia-based cable system founded by his father.

For some, Trian’s investment simply highlights how undervalued Comcast is -- not the potential for meaningful change. “We believe investors should not expect any strategy shifts,” said Douglas Mitchelson, an analyst with Credit Suisse, in a note to clients earlier this week.

Mitchelson raised his price target by $10 a share to $60, arguing the cable business remains strong and the headwinds caused by the coronavirus are fading. NBCUniversal is cutting costs at the networks, and the new Peacock streaming service is bolstering its negotiating leverage as it prepares for a cycle of new affiliate-fee deals, he said. He added that NBC will host two Olympics, a Super Bowl and a World Cup in 2021 and 2022.

Still, there is a strong argument for a breakup. Comcast’s cable business is worth at least $50 billion more than the entire company’s current enterprise value, according to Bloomberg Intelligence. That suggests investors are assigning zero value to NBCUniversal and Sky, and are frustrated with a lack of clarity in the asset mix, Bloomberg Intelligence analyst Geetha Ranganathan wrote in a recent note.

Comcast has tried to show how all the pieces work together through an occasional companywide effort it calls “Symphony.” Peacock is heavily promoted to Comcast’s broadband customers, for example.

But some analysts say the synergies between the cable and entertainment sides of Comcast are tenuous at best.

Different Directions

And lately, Comcast’s units have been headed in different directions. Comcast’s internet business is flourishing during the pandemic as people need broadband connections more than ever to work and attend school remotely online. Meanwhile, NBCUniversal has struggled with shuttered theme parks, a shutdown of TV and movie production, a nationwide closing of movie theaters and a decline in advertising.

Others have questioned how Sky fits into the broader conglomerate at all. Comcast acquired Sky two years ago for roughly $36 billion, but the division is now worth about $10.5 billion as satellite providers continue to fall out of favor, according to Craig Moffett, an analyst from MoffettNathanson Research.

“Comcast’s decision to buy Sky was unpopular with investors from the moment it was announced,” he said in a note to clients June 29. “Only part of that was because the business itself was viewed unfavorably. The rest was because it played to fears that Comcast’s capital allocation strategy was unreliable.”

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