Credit analysts say buy Comcast paper on Liberty Media play for QVC

Ronda Fears

Nashville, March 3 - Liberty Media's surprise play Monday for QVC will be neutral to Comcast bonds so CreditSights analysts advise buying Comcast's paper as it trades wider since they still view the name as a core media holding.

"We view the transaction as neutral to Comcast bonds, and with Comcast bonds trading 10 basis points wider on the news, we would be buyers of Comcast paper," said analysts Patricia Lee and Glenn Reynolds in a report Monday

The analysts added that they see the transaction as only a slight negative for Comcast shares, with the reduced diversity and lower growth posed by the loss of QVC offset by the enhanced balance sheet impact.

Liberty Media's "opportunistic" play for QVC is largely possible, the analysts said, due to Comcast not having the funding capacity to buy Liberty's 42% stake in QVC, thus leaving it vulnerable to take out.

"We view the action as neutral to Comcast bonds, with the loss of QVC's EBITDA contribution offset by the estimated $7 billion in additional debt reduction for a pro forma year-end leverage ratio of 2.8x vs. 3.5x, but with QVC still representing a double-digit growth unit as a slight negative for Comcast shares," the analysts said in the report.

"We continue to view Comcast as a core media holding based on favorable cable fundamentals, which also offer good near-intermediate term growth prospects, as well as Comcast's enhanced competitive position post the Broadband acquisition."

Liberty Media (Baa3/BBB-) triggered the "exit rights process" for its 42% stake in QVC, which under the terms of the agreement with Comcast (Baa3/BBB) will immediately trigger a fair market valuation for QVC.

Once a value has been reached, Comcast will first have the right to acquire Liberty's stake. If Comcast does not elect to make the purchase, Liberty will then have the option to acquire Comcast's stake. If neither party exercises its purchase option, QVC will be put up for sale on a best efforts basis.

Liberty is taking advantage of Comcast's current heavy debt burden in the wake of its acquisition of AT&T Broadband to gain control over QVC, with a likely partial IPO/monetization at a later date, the CreditSights analysts said.

"With QVC representing 27% and 16% of pro forma 2002 revenues and EBITDA and a still double-digit revenue/EBITDA growth unit, Comcast would not readily dispose of its majority stake in the electronic retailer and ordinarily would exercise its first right to acquire Liberty's stake," the analysts said.

"However, it is quite difficult to see how Comcast can now finance a take-out as the company is aptly focused on debt reduction to restore its balance sheet following the AT&T Broadband acquisition. Thus, we believe Comcast will be forced to relinquish its stake in QVC."

Comcast ended 2002 with $29.5 billion in total debt and was expected to end 2003 with roughly $25 billion in total debt, with an estimated $5 billion in asset sales to be completed during the year.

Assuming QVC is valued at $12 billion - the mid-point of the $10-$14 billion valuation range - Comcast would get roughly $7 billion for its 58% stake.

"With Comcast likely to apply all of the after-tax proceeds toward debt reduction, we estimate that Comcast's pro forma year-end 2003 leverage ratio would fall to just under 3.0x, or within solid investment grade parameters," the analysts said.

"Our continued recommendation of Comcast as a core media holding is underpinned by the solid outlook for near-intermediate term cable fundamentals. In addition, we see particular upside for Comcast from its greater scale and coverage post the Broadband acquisition."

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.