Media and Communications Stocks Reporting Big News

By Steve Birenberg

News flow has picked up since the Thanksgiving holiday. Now if only the stocks would do the same.

After the Thanksgiving lull, things are picking up for media and communications stocks. The stocks themselves are still lagging the market but at least there is news to discuss.

On a positive note, Comcast (CMCSA) and Time Warner(TWC) agreed to sell their wireless spectrum to Verizon Wireless (VZ) for $3.6 billion. Comcast owns 63.6% of the spectrum and will receive approximately $2.3 billion. Time Warner Cable owns 31.2% for approximate proceeds of $1.1 billion. This is a win for cable stocks on two fronts. First, those receiving the proceeds have reloaded their balance sheets at a time when the Street looks favorably on share buybacks and dividends. Turning a non-cash-generating asset to cash frees up the asset to be used for share buybacks, most likely. Comcast and Time Warner Cable were already aggressive on share buybacks. However, Time Warner Cable is buying Insight and its debt level is pushing the upper limits of the target range. Deleveraging via an asset sale helps greatly. Comcast is underleveraged and arguably is blocked from acquisitions due its size and scope (not just cable but also the NBCUniversal deal). Increasing total capacity to buy back stock by deleveraging is a long-term positive.

Perhaps more important to Wall Street than turning unused spectrum to cash is that the cable industry leaders have clearly stated they will not build out wireless networks. I think this has been obvious for sometime and took management teams at their word. Other investors were not so generous given cable's long-running battle for consistent credibility on the Street.

There is some regulatory risk to the deal given the government's tough stance on AT&T's (T) proposed acquisition of T-Mobile. From what I have read, there'll be a tough regulatory review of the transaction. However, Verizon's current spectrum position leaves room to grow based on prior regulatory rulings, so approval seems likely. After all, cable has made no effort to operate on this spectrum and there are no customers changing hands.

The benefit of the sale works for all the publicly traded companies as any cable offering of wireless would have likely been industry-wide. Thus, Charter (CHTR) and Cablevision (CVC) shareholders also benefit along with privately held Cox Communications. The benefit is likely to appear as a slightly higher valuation multiple given that the risk of building out a wireless network is off the table.

In other news, the NFL has extended its broadcast rights deals with CBS (CBS), NBC, and Fox (NWS) for a massive annual increase of 60%. This is not a surprise given that ESPN/ABC already had negotiated a new deal on similar terms. The settlement of NFL lockout last summer set the stage for extending the deals as it insured 10 years of labor peace. Normally, a massive cost increase like this would cause handwringing among investors. However, retransmission fees are now in place providing a mechanism for passing though the price increases to cable and satellite operators and ultimately subscribing households. The debate over retransmission and affiliate fees is likely to escalate again so expect more talk of a la carte, cord cutting, and new programming bundles. This worries the Street and compresses multiples on cable and satellite stocks but there is no real alternative to the current system than makes sense for subscribers. A la carte would surely mean fewer channels for the same monthly bill for most subscribers.

Also in the news this week is the annual UBS Media Conference in New York. This conference used to be a big deal for news as many media companies used it to set expectations for the year ahead. The world has changed, however, and those expectations were mostly spelled out on September quarter conference calls or will be provided early in 2012 when December quarter earnings are reported.

Not surprisingly, with earnings reports happening just a month ago, there is little change in tone or commentary from management teams presenting at UBS. Most national TV companies admitted to slightly slower activity in October and November but noted a meaningful pickup in December. Scatter pricing appears to running mid-teens ahead of 2011 upfront pricing for networks with stable ratings. Weaker networks are struggling a bit with scatter. Pricing premiums are lower than they were a year ago and poorly performing networks are not getting a “rising tide lifts all boats” benefit.

Many on the Street see this as a sign of impending doom for the ad market. I disagree. I think the ad market is healthy. What we are seeing is a maturation of the current cycle from the bounce off the bottom to normal cyclicality. Clearly, the lower momentum at this stage of the cycle represents risk if the U.S. economy succumbs to weakness. At the moment, the opposite appears to be the case as U.S. economic data has mostly surprised to the upside. The early 2012 read on the ad market is also positive with upfront cancellations showing no sign of picking up. Ad-supported media stocks remain well off their highs and look very attractive if the ad market holds together for 2012. I remain a believer.

(See also: Dixon's Take: The Three Key Stories for Media Investors in 2012)

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