The Wall Street Journal-20080130-breakingviews-com - Financial Insight- Roberts Faces Rocky Road- Comcast CEO Is Under Fire From Shareholder Chieftain Over Management Practices
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Brian Roberts isn't used to taking a lot of flack. Just a couple of years ago, the Comcast Corp. boss was given most-favored-chief- executive status in a poll of shareholders by Institutional Investor magazine. He is a regular at media-mogul fests like Herb Allen's in Sun Valley, Idaho. So a campaign from one of his hedge-fund shareholders against his stewardship of the $55 billion cable group his father founded might come as a shock to Mr. Roberts. It shouldn't be so surprising.
On the subjects that matter most to investors -- financial performance, strategy and corporate governance -- Comcast's scores are decidedly lackluster. So much so that Mr. Roberts would be well advised to consider changing his ways in the face of Chieftain Capital's attempt, made public last week, to foment a shareholder revolt.
Comcast's financial performance should be the starting point. The stock has fallen 39% in the past year. While it has held its own over the past couple of years relative to competitors such as Time Warner Cable Inc., the future doesn't look especially bright. Revenue is expected to rise at an annual rate of 6.6% for the next five years, compared with 8.3% growth at Time Warner Cable, Bear Stearns estimates.
Comcast also has proved itself to be a poor acquirer. Since 1999, it has spent about $80 billion on acquisitions, including the $58 billion purchase of AT&T Broadband in 2001. The return on all that invested capital has been meager, only 5% this past year, according to an analysis done by Chieftain. That is less than the company's weighted- average cost of capital of 8%. Comcast doesn't dispute this but says it has been steadily improving returns in the past few years and projects that this will continue.
Comcast would have spent even more if it had had its way. It tried to buy Walt Disney Co. for $66 billion in 2004 in a deal that looked dilutive for Comcast's shareholders at the time. That attempt also ran against industrial decisions by rivals, chiefly Time Warner Cable, to separate their content and cable-distribution businesses. It is true that Comcast has sold quite a few assets in recent years, including shopping channel QVC, but with part of Mr. Roberts' compensation pegged to increasing cash flow, irrespective of whether it is acquired or organically driven, it is hard not to get the impression he is more interested in empire-building than delivering adequate shareholder returns.
Comcast's governance may leave the bitterest aftertaste. Comcast has a dual-class share system that gives Mr. Roberts a third of the voting power despite owning less than 1% of the total stock. While this is typical of many U.S. media concerns, Mr. Roberts' stake comes with an added provision that allows him to keep his voting power even if Comcast issues new stock. That puts him on an entirely different plane from ordinary shareholders when using his stock as acquisition currency.
Another of Chieftain's governance complaints is the annual salary the company has agreed to pay founder and Chairman Ralph Roberts' estate for five years after he dies. Comcast says Mr. Roberts, 87 years old, has had the arrangement in place for more than a decade, and shareholders never previously complained. That is hardly an excuse for retaining this medieval governance provision.
So with all these marks against Mr. Roberts, does Chieftain have a chance? With a voting stake of only 0.1% in the company, it doesn't have much leverage relative to the family's one-third vote. But at other media groups, such as Cablevision, founders with voting control have seen their credibility weakened by activist shareholder campaigns. And Comcast's investors are nursing losses of approaching half their investment in the past year. If Mr. Roberts wants to win future polls for most-favored CEO, he should take the complaints seriously.
-- Lauren Silva and Rob Cox
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This column is by breakingviews.com, an online financial commentary site.
