Bill Nygren votes for the Comcast deal

chart_ws_stock_comcastcorp.top(2).png By Tim Gray, contributor


FORTUNE -- The noted manager at Oakmark funds bought 7.5 million shares of the cable provider after it announced it was buying NBC Universal. Here are five reasons why he things it's a great connection.

1. Comcast got NBC Unversal cheap

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Bill Nygren, Oakmark Funds

Comcast agreed in December to buy NBC Universal for $30 billion. But in reality, Nygren says, Comcast is paying only $6.5 billion in cash plus its cable-programming assets. NBC Universal will be placed in a joint venture -- 51% owned by Comcast, 49% by GE -- that Comcast will manage. Comcast (CMCSA, Fortune 500) has to pay GE (GE, Fortune 500) only 25% of any increase in the joint venture's value during its seven-year duration. Notes Nygren: "Comcast won't have to use its own capital to make the payments -- it'll use cash flow generated by the joint venture. Effectively, it's using GE's money to pay GE. So Comcast put up $6.5 billion today for 100% ownership seven years from now."

2. The deal will pay off quickly

"CEO Brian Roberts's play for Disney (DIS, Fortune 500) in 2004 hurt Comcast's stock unjustifiably," Nygren says. "When that deal fell apart, the market worried that Roberts would pay too much to go Hollywood. The stock treaded water for several years, while revenue and cash flow per share have more than doubled and earnings per share have quadrupled. The NBC Universal deal should continue the trend. NBC is producing strong cash flow out of its cable networks -- USA Network, Bravo, MSNBC, CNBC, and others." As the deal awaits antitrust approval, Nygren thinks shares are still priced right: "At the current price [about $18], I consider Comcast to be one of our most attractive holdings."

3. The company's big spending is done

For years, Nygren notes, investors assumed that cable companies were video-only businesses. "Then," he says, "along came two great opportunities -- the Internet and telephony. Both required significant capital expenditures that prevented cable companies from generating free cash flow. Now they're nicely cash flow positive. You're getting a 2.3% dividend yield from Comcast, and three years ago it didn't even pay a dividend. So the build-out is complete, Comcast can offer the triple play [cable, Internet, and phone service], and there isn't some monstrous new opportunity looming that'll eat up cash."

4. Cable will win the battle for video

"Cable has the best pipes coming into the home," Nygren argues. "The basic network is faster than what the phone companies have. For the phone companies to offer high-quality video, they'll have to make major capital expenditures that Comcast has already made." Verizon (VZ, Fortune 500) offers FiOS, which delivers the same assortment of programming as cable TV in some markets. But, Nygren argues, it's not economical to offer it nationally. "That's probably not the highest and best use of its cash," he says. "Some investors worry about Internet video bypassing cable -- the YouTube phenomenon. But mass-market delivery of video still works best through cable and the airwaves."

5. Cable spending is recession-proof

"You haven't seen home penetration for cable fall off in the recession," says Nygren. "The industry uses the term 'multichannel households' to refer to homes that subscribe to either cable or satellite. Today that number is just over 100 million households. To my knowledge, there has never been a decline in multichannel households. Consumers don't treat this as a luxury good. As people cut back in other areas, cable spending often increases. Premium channels like HBO are not quite as recession-proof; they've experienced down years. But it's cheaper to subscribe to HBO for the month than it is to take a family of four to the movies."  To top of page