In acquiring Telemundo last week, NBC not only bought into the fastest-growing TV advertising sector but also gained a second string of outlets with which to bundle sales and programs and a company that will immediately deliver about $170 million in profits.
And it looks as though NBC is going to give Spanish-language-television leader Univision a run for its money as it makes Telemundo a more competitive No. 2.
“We’re coming, Jerry. Watch your back,” Telemundo CEO James McNamara quipped, referring to Univision owner Jerrold Perenchio. Mr. McNamara and Telemundo Chief Operating Officer Alan Sokol have been signed to new long-term contracts.
The initial squirming over the $2.7 billion price tag-and implied 23 times cash flow multiple-soon dissipated when industry analysts took a closer look at the synergies and cost savings, more than 60 percent of which are on the ad sales side.
“The actual multiple will be in the low double digits, making this a very attractive acquisition for us,” NBC Chairman and General Electric Vice Chairman Bob Wright said in an interview with Electronic Media. “On a stand-alone basis it would be very expensive. But with what we can bring to the table the multiples drop dramatically.”
“We have a tremendous amount of synergies in terms of program facilities, sales and costs. We are co-located in five of the biggest markets in the country,” Mr. Wright added. “In the advertising environment we are in, having us with them and having Telemundo with us helps both of us.”
If the NBC and Telemundo entities were being sold together today, they would generate additional “tens of millions of dollars” even in this depressed market, Wright said.
“We have more range of contacts with clients. We have more volume of business. We have stations in L.A., New York, Miami, San Diego, Chicago, where there are large communities already involved with the same large advertisers.”
Merrill Lynch analyst Jessica Reif Cohen said NBC’s most formidable move might be to effectively close “the infamous gap in Spanish-language media between audience share and its significantly lower advertising share.”
Driving the first full year of operation, Telemundo is expected to generate $250 million in earnings on $600 million in revenue, Mr. Wright said.
“Telemundo gets a lift, but Univision still rules,” said James Marsh, analyst at Robertson Stephens. “The entrance of a Big 4 network into the market could grow the Hispanic ad pie.” However, Mr. Marsh added, “We think it may be difficult for NBC to realize significant cost savings.”
Despite NBC’s plans to realize synergies from shared facilities, multiple purchase, shared engineering and back-office support, Mr. Marsh said Telemundo must retain its own sales force and Spanish-language newscasts. He noted that NBC has little clout negotiating for Hispanic content.
“Dubbing does not work,” he said. “NBC will not accomplish much by repurposing programs on Telemundo for the simple reason that Hispanics do not watch NBC now because they are looking for something else.”
Mr. Wright said the deal is clearly not about cloning a second string of NBC program outlets but about realizing synergies and developing a viable Hispanic market for NBC resources, adding that Telemundo would remain “a network devoted to the Hispanic television audience.”
“We have some programs and formats that may work well in Spanish, but that’s up to Jim and his team to decide,” Mr. Wright said.
When current Telemundo co-owner Sony tried to recycle dubbed TV series such as “Starsky and Hutch” and “Charlie’s Angels” from its library, there was a sharp decline in audience delivery.
“We think there is tremendous potential for Telemundo. It hasn’t really had the capital we can provide it with. Our production facilities, sales organization and client relationships will offer it a big shot in the arm,” Mr. Wright said.
There are many notable things about the Telemundo deal: It’s the first major foray of a mainstream broadcaster into the Hispanic TV market and the first time NBC corporate parent General Electric has used its stock as a partial payment for a broadcasting deal of this size and type.
Telemundo owners Sony Corp., John Malone’s Liberty Media Corp. and other investors are being paid $1 billion in cash and $980 million in GE stock, making them new GE shareholders. About $700 million of the deal, paid in cash and General Electric stock, is debt assumption.
Mr. Malone and Liberty already have sizeable stakes in other major media players such as AOL Time Warner and News Corp. Sony and Liberty acquired Telemundo in 1998 for $600 million.
“GE is in here to see how good this business can be,” Mr. Wright said.
GE is using its own stock rather than creating an NBC deal currency by publicly spinning off the Peacock network company. That remains an option for future deals, analysts said. (See Deals column, Page 10).
Nearly $100 million the first year will be generated by new revenues from bundling NBC and Telemundo properties and from fleshing out at least four major-market TV duopolies in Los Angeles, Chicago, Miami and Dallas.
NBC will apply for a waiver to retain the three stations it will have in Los Angeles. It would likely consolidate its two Telemundo stations in the city. Telemundo intends, however, to seek TV duopolies in other markets.
The deal-which could take nine months to close since it requires approval by the FCC and Telemundo shareholders-has sparked speculation that if NBC must divest one of the TV stations in Los Angeles, it may use that station as currency to launch a new bid to acquire KRON-TV, San Francisco, from Young Broadcasting. On Jan. 1, KRON is set to shed its valuable NBC affiliation, which will shift to Granite Broadcasting’s KNTV in San Jose, Calif.
Mr. Wright said while another run at KRON is possible, he would like to see station sale multiples decline further. “Anything is possible,” he said, although there are no active discussions going on.
Mr. Wright said NBC will seek to acquire more television stations or cable entities for itself and for Telemundo, and possibly program-related entities, spurred by accounting law changes.
“Because of them, we’re more competitive with companies like Viacom. It puts us on equal footing with others. It gives our dollar the same value as theirs,” Mr. Wright said.
Telemundo owns and operates 10 UHF television stations and the U.S. Spanish-language cable network Mun2. The Telemundo broadcast network reaches 88 percent of U.S. Hispanic homes through its owned stations and 40 affiliates.
Mr. McNamara, who is credited with boosting Telemundo through a program overhaul during his two-year tenure, said the company can become No. 1 by programming to the Hispanic market “mosaic,” because it is not a homogeneous market.
“You’re always trying to appeal to the broadest group possible, and we do that by producing and acquiring the best programs we can find from Latin America. Adding NBC product and best practices from NBC will go a long way in achieving that goal,” Mr. McNamara said.
NBC will produce some Spanish-speaking news for Telemundo and will explore adopting some of its popular programs such as “Dateline,” “Access Hollywood” and “Weakest Link.”
NBC may produce comedies for Telemundo to complement its popular daytime soaps, prime-time novelas and soccer telecasts.
While it does not have the Spanish-language rights for February’s Olympics in Salt Lake City, NBC plans to have the Spanish-language rights for the other future Olympics, especially the Summer Games, which are more popular with Telemundo’s demographic.
“[Telemundo has] a program budget and detailed program plans. But with us on board, it gives them a lot more opportunity to be more aggressive in terms of the types of deals they can do. They run a pretty tight financial reign,” said Mr. Wright, who added that NBC could increase Telemundo’s program investments by at least 10 percent.
In turn, Telemundo will introduce NBC to a new talent pool of writers, producers, and
actors.
“This is growth by acquisition, but we chose the smaller player,” Mr. Wright said. … “In some respects, it’s a little like when we bought FNN [Financial News Network and forerunner to CNBC].”