Comcast has had a frustrating run as a partial owner of video streaming platform Hulu, but that doesn't make the decision to sell its minority stake in the company any easier.
Disney and Comcast are holding talks about working out a deal for Comcast's 30% stake, according to people familiar with the matter. Comcast is now weighing the pros and cons of doing a deal now rather than later, said these people, who asked not to be named because the discussions are private. It's still unclear if a deal will transpire.
The two companies are the last remaining owners of a company that was originally founded as a joint venture between several media giants. Hulu last week bought back a 9.5% stake in itself from Time-Warner owner AT&T, in a deal that values Hulu at $15 billion. That 9.5% stake will be split between Disney and Comcast, unless Disney consolidates the entire company.
"On Hulu, the relationship with NBC, it's very much in everybody's interest to maintain," Comcast CEO Brian Roberts said Thursday during an interview on CNBC's "Squawk Box." "And we have no new news today on it, other than it's really valuable. And we're really glad we own a large piece of it."
For years, Comcast was barred from having a say in Hulu's direction — part of a consent decree Comcast agreed to when it acquired NBCUniversal in 2011. (NBCUniversal is the parent company of CNBC.)
Seven years later, Comcast's ownership in Hulu switched from passive to active, when the consent decree expired in 2018. That gave Roberts and NBC CEO Steve Burke some say in the company's future.
But just as Comcast came off the sidelines, 21st Century Fox agreed to sell its 30% stake in Hulu to Disney. That deal, which closed last month, effectively silenced Comcast once again. Instead of being an equal owner with Fox and Disney, Comcast now owns a minority stake to Disney's 60%.
"Fifty years from now will we be in Hulu? No, I don't think we will," Burke told Variety in January. "But I don't think we'll sell in five minutes."
As of today, NBC provides about 17% of Hulu's content. NBC has no plans to remove content from Hulu, which will continue to serve as NBC's vessel for same-season shows even after the launch of the company's new streaming service in 2020, according to people familiar with the matter. (NBC's streaming service will showcase the company's library of TV shows and movies.)
There are compelling reasons for Comcast to hold and to sell. Here's what Comcast is debating, according to people familiar with the company's thinking.
There are several reasons for Comcast to hold on to its stake.
Valuation. If Comcast believes in Hulu, the biggest reason to hold is valuation appreciation.
Right now, Hulu has 25 million subscribers, less than half of Netflix's 58 million paying U.S. customers. But Netflix's valuation, at $167 billion, is more than 11 times that of Hulu. While Hulu's valuation has expanded from $5.8 billion to $15 billion since August 2016, a gain of 158%, Netflix has gained more than 300% over the same period.
If Comcast expects Hulu's value to rise as much as Netflix, it would be silly to sell now unless Disney offers an insanely high premium.
Negative controls. While Comcast doesn't have majority control over Hulu, it does hold so-called negative controls on Hulu. These rights give Comcast certain veto power over different corporate actions associated with the company. While the specifics are private, protective provisions typically include veto power over raising capital, paying dividends, future acquisitions and potentially going public. Three of Hulu's nine board members are from Comcast/NBCUniversal — Jeff Shell, Linda Yaccarino and Matt Bond.
Future leverage. Keeping control of 30% of Hulu is also leverage for Comcast over Disney. If Comcast ever wants a Disney asset down the road, the minority stake would give Roberts and Burke a bargaining chip.
Valuation. Just as valuation is the main reason to hold, it's also ultimately the reason to sell.
Comcast and NBC have long been skeptical of the business model behind streaming video. This is why NBC decided to hold back on going whole hog into streaming video like Disney has done with Disney+. Burke has viewed Netflix skeptically over the years, suggesting the company may not be able to live up to its lofty valuation.
"To be worth $150 billion, someday you've got to make at least $10 billion in EBITDA," Burke told CNBC last year. "There's at least a chance Netflix never makes that."
If Comcast doesn't believe in Hulu, especially under Disney's control, there's simply no point in dragging this on. Keeping a stake in a company it doesn't control may not be the best use of Comcast's funds.
Losses. Hulu will lose $1.5 billion this year, Disney said at its investor day last month. The company won't turn profitable until about 2024, Disney estimated, and that's not taking into account potential international expansion, which will come with its own added costs.
If Comcast wants to rid itself of those losses and take the cash from a sale to pay down debt from its $39 billion acquisition of Sky, selling soon may be an appealing option. Comcast also pays a dividend and could use the cash to support it. At a valuation of $15 billion, Comcast would walk away with $4.5 billion from the sale. (Comcast has more than $100 billion in debt).
Strategic reasons. Comcast's minority control means that Hulu does not always match the company's long-term strategic plans.
For instance, Hulu would probably not have an advertising-free option today if Comcast had an active say in the company's plans, one of the people said. NBCUniversal's preference with streaming video is to include ads, as it's doing with its upcoming service.
Selling the Hulu stake also would remove this strategic uncertainty — and could help right a severely strained relationship with Disney, which bubbled over when the companies battled over 21st Century Fox last year.
Comcast and Hulu declined to comment on this story. Disney did not respond to requests for comment.
Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC.