NBC-Vivendi Deal Would Maximize Value of Both Players’ Assets

Aug 25, 2003  •  Post A Comment

General Electric’s NBC is uniquely positioned to acquire Vivendi Universal Entertainment using no cash or stock in what looks like a $14 billion deal. It could then squeeze at least $400 million in initial cost savings and synergies from the merged GE-owned and -managed media subsidiary while minimizing its own declining economics.
But the deal, whether it happens or not, already is having broad, serious implications for all involved.
The strict merger proposal and GE’s commanding negotiating style have shifted control of the unwieldy auction away from Vivendi Universal, which now has to play by NBC’s rules if it wants the prestige and value of a 20 percent to 25 percent stake in an entertainment powerhouse that also will take on an estimated $2.2 billion of Vivendi’s sprawling debt.
The fact that Vivendi’s board is set to meet Tuesday at NBC headquarters at Rockefeller Center in New York may be the first public gesture of capitulation.
But high-level sources close to the talks to hammer out a preliminary merger plan-which could slip into exclusive negotiations after Tuesday’s meeting-warn about the fragile nature of dealing with the French conglomerate, and the eagerness of other bidders such as Liberty Media Corp. and Edgar Bronfman Jr. to stay in the running. Sources say even if NBC gets VUE’s cable networks, television production and Universal Studios assets, the parties could agree to flip Vivendi Universal Music to Mr. Bronfman and the theme parks to the Blackstone Group, a backer of the Bronfman bid.
The creation of a $50 billion-plus content production and distribution behemoth, with an estimated annual $14 billion in revenues and $3 billion in operating profits (including theme parks), is only possible because of GE’s uncommon ability to structure a deal not reliant on cash or stock, with GE Capital handling $2.2 billion in Vivendi debt and its $2 billion tax liability with InterActive’s Barry Diller.
NBC management’s frugal GE-honed fiscal and operating skills will be able to save nearly half a billion dollars in mostly cost savings in the first year or so, largely from VUE units’ redundant personnel and operations as they are folded into NBC. At least $50 million will come out of the cable networks.
Over time, just $300 million in cost savings and synergies could be worth more than $5 billion in equity value, factored by applying a media company public market value of 25 times cash flow, according to Bernstein Research analyst Kerry Stirton. Mr. Stirton estimates GE could see an additional $850 million in industrial operating profit and gain 2 cents in earnings per share in 2004 as a result of the deal.
Just as NBC did more than a decade ago, VUE’s operations and personnel are expected to embrace GE’s fine-tuned, formulaic corporate culture, which has never been applied to a Hollywood studio. The deal would be the crowning achievement of the 17-year media career of NBC Chairman and GE Vice Chairman Bob Wright, who has boldly led industry change and was foiled earlier in trying to merge NBC with Sony Corp. and Mr. Diller’s then-USA Networks Inc. GE Chairman and CEO Jeffrey Immelt has yet to sign off on the final deal terms, sources said, but is now committed to morphing NBC-if not with Vivendi, then perhaps with Comcast, Sony, MGM or even Liberty.
High-level sources said the big sticking points continue to be valuing NBC TV Network (which is expected to endure ratings and revenue declines after its hit prime-time series retire next season) and the cable networks (especially USA, whose affiliate fees are in flux). A nickel lost or gained from USA’s 41 cents-per-subscriber monthly fee can mean $1 billion in value. While NBC is expected to post a record $850 million in operating income this year on $2 billion in revenues, its 15 percent profit growth rate will drop to 6 percent in 2004 and will go flat by 2005, said Scott Davis, analyst at Morgan Stanley.
The joint venture is the only way for NBC and VUE to unlock the value of their media assets, which are trapped inside global conglomerates, which carry much lower valuations than media concerns, and offset certain future revenue and earnings shortfalls.
Perhaps the biggest issue is what, if any, guaranteed value GE can provide Vivendi as part of an exit plan it can borrow funds against now and cash out with over the next several years. Since GE is not likely to use cash or its stock, which it is careful not to dilute, an exit plan could hinge on a public spinoff of the merged subsidiary as early as 2005, although that also is not GE’s style.
NBC would be able to realize a number of synergies between Vivendi’s USA TV Studios and NBC. Having a larger TV studio in-house would give it more leverage in negotiating with the remaining studios. There are also synergies from combining the advertising sales forces across the various channels, extending its 2004 Olympics telecasts onto USA.
NBC would avoid the profit premium now paid to VUE for programs, including “Law & Order,” although the savings would be offset by the loss of sales and profit on the VUE side, making that series situation a wash. NBC currently acquires 75 episodes annually of the “Law & Order” series produced by USA TV Studios at an average price of $7 million per one-hour episode.
NBC would merge its and VUE’s cable networks into a single unit, and do the same with Universal TV and its own NBC internal TV production units, sources said. Universal Studios, whose unpredictable economics would bring new volatility to NBC’s overall financial performance, would be a separate unit.
For GE and NBC, the VUE deal represents a necessary move to put the media giant on equal footing with conglomerates controlling content production and distribution, such as Viacom and News Corp.’s Fox Entertainment Group, which will soon break new ground commanding satellite provider DirecTV.
Michael Nathanson, another Bernstein analyst, said although Vivendi shareholders have no immediate return, they should realize that, long-term, an NBC-VUE merger “could allow Vivendi to claim that its target price was achieved, as private valuations do not create as concrete a price tag as a public deal.”