Comcast: Do Strong Earnings Sweeten the Time Warner Cable Deal?

Source: Getty Images

Source: Getty Images

Shares of Comcast Corp. (NASDAQ:CMCSA)(NASDAQ:CMCSK) edged higher in early trading on Tuesday after the tech and media giant reported strong first-quarter results. Revenue of $17.4 billion, up 13.7 percent on the year, was higher than the mean analyst estimate of $17.04 billion, while adjusted earnings of 71 cents per share, up 31.5 percent on the year, beat the mean analyst estimate of 64 cents. Unadjusted earnings of 68 cents per share were up 33.5 percent on the year.

Significantly, video customers increased by 24,000 in the first-quarter, the second consecutive month of growth and a sign that Netflix (NASDAQ:NFLX) hasn’t quite taken over the world, yet. “Our focus on the customer experience continues to drive our success as we deliver the most innovative products in the industry and make measurable progress in customer service,” commented Comcast Chair and Chief Executive Officer Brian Roberts in the earnings release. “At NBCUniversal, we had another superb quarter with double-digit revenue and operating cash flow growth driven by the tremendously successful Sochi Olympics and the best season-to-date broadcast ratings in a decade.” The Sochi Olympics generated $1.1 billion in revenue for NBC Universal.

On the bottom line, Comcast reported operating income of $3.57 billion in the first-quarter, an increase of 16.3 percent on the year. However, thanks primarily to “increased working capital, mainly driven by the Olympics and higher film and TV production spend, capital expenditures and cash taxes on operating items,” free cash flow was down 10 percent on the year at $2.82 billion.

But with the Olympics in in the rear-view mirror, Comcast’s proposed merger with Time Warner Cable (NYSE:TWC) is the most important thing on the road right now. Earlier this year, the two cable companies announced their desire to get corporate-hitched, and revealed a $45.2-billion stock-for-stock merger proposal. Comcast wants to purchase 100 percent of Time Warner Cable’s 284.9 million outstanding shares for 2.875 shares of Comcast Class A common stock each. Comcast’s normal Class A common stock, which trades under the CMCSA ticker, has fractional voting rights, whereas the special Class A common stock, CMCSK, has no voting rights. Comcast also has a non-publicly traded Class B stock, which has 15 votes per share.

If the deal goes off without a hitch, Time Warner Cable shareholders will be left owning 23 percent of Comcast’s common stock. Roberts sweetened the deal by announcing a $10 billion share repurchase program to be conducted at the close of the transaction. Moreover, Roberts believes “there are meaningful operational efficiencies and the adjusted purchase multiple is approximately 6.7x Operating Cash Flow.” Executives believe that they can squeeze about $1.5 billion in efficiencies from the combined entity.

“Overall, the company is performing well and the more planning we do for our proposed merger with Time Warner Cable, the more excited we are by the opportunities for the combined company,” continued Roberts. “Comcast has tremendous momentum right now, and we believe the TWC transaction will strengthen a truly world-class organization that will be well positioned to compete and yield meaningful benefits to our customers, employees, and shareholders.”

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