Sep 1, 2003  •  Post A Comment

The fact that NBC is worth an estimated $35 billion today-and generating a record $2 billion in annual profits-is solid evidence that corporate parent General Electric is capable of creating as much as $15 billion in new value from a media merger with Vivendi Universal Entertainment. This is staked against claims to the contrary by rival bidders and Vivendi Universal Vice Chairman Edgar Bronfman Jr.
In fact, Mr. Bronfman’s charge-that a GE/NBC deal would be a “wrong outcome” for Vivendi’s shareholders and stock-appears ludicrous in light of his own failed efforts to successfully operate or improve the value of the VUE assets, some of which his family once owned. Since selling the Universal studio, theme parks and other operations to Vivendi in 2000, the Bronfman family, which has a 5 percent stake in Vivendi, has lost between $6 billion and $8 billion, sources said.
Before temporarily withdrawing from board participation during the ongoing VUE auction, Mr. Bronfman has had a hand in overseeing the declining fortunes of Vivendi and its VUE subsidiary.
In other words, he’s hardly one to talk.
Still, in comments to the Financial Times, Mr. Bronfman chided GE and NBC for lacking film studio experience, and equated GE’s ambitious internal forecast of $500 million in first-year synergies and cost savings with the costly unfulfilled promises of ousted Vivendi chairman Jean-Marie Messier.
Without going on the defensive, Bob Wright, NBC chairman and chief executive officer, and also vice chairman of GE, last week told me: “(NBC Universal) certainly would be a strong company, and have a very good future. I think we’re in a good position, but you never know about these things.” He declined to comment on the details of NBC’s merger proposal or his ongoing discussions with Vivendi CEO Jean-Rene Fourtou. GE and Vivendi also declined to elaborate.
But revealing details from well-placed sources about the preliminary terms and stipulations that NBC and GE have set for a VUE deal underscore precisely why Vivendi’s entertainment assets would be in good hands. Few in the corporate business world drive a harder, smarter deal, or have a stronger track record to show for their efforts, than GE Chairman and CEO Jeffry Immelt and Mr. Wright, a GE veteran who has catapulted NBC’s fortunes and boldly set new industry standards.
As prime-time ratings cycles go, GE needs to acquire VUE if it wants to secure NBC’s financial and competitive leadership. But it’s not about to jump in without requiring Vivendi to eliminate some of the onerous liabilities attached to VUE, and to agree to strict terms-all of which are designed to protect GE and NBC’s risk and maximize their upside.
As first reported in Mermigas on Media Aug. 27, GE and NBC are asking Vivendi to eliminate or settle what some experts estimate is at least $5 billion of costly and compromising arrangements put in place by Mr. Messier. These stipulations could involve Vivendi having to buy out former VUE chairman Barry Diller. A new $1.5 billion Internal Revenue Service ruling last week was added to Vivendi’s long list of outstanding liabilities.
Mr. Diller and his InterActive Corp., which have a collective 7 percent stake in VUE, have filed a lawsuit against Vivendi over an estimated $2.4 billion in tax liabilities and other payments.
Sources familiar with internal GE analysis said the company expects to realize between $10 billion and $15 billion in new value from the newly merged NBC Universal, having created many times that value since acquiring NBC as part of the now-defunct RCA in 1986. At the time, GE had no solid experience operating TV stations or networks. Under long-time chairman and CEO Jack Welch, Mr. Wright did what many said could never be done: They efficiently and effectively reshaped a tradition-bound media giant in the highly disciplined mold of a global industrial conglomerate, demonstrating that great business practices and performance-based initiatives work anywhere.
But, despite GE’s and NBC’s stellar track records for prudent, progressive management, much of the projected VUE merger gains hinge on inheriting “clean” assets that are not impeded by previous pacts and which could keep the combined company from making money, sources said.
“If Vivendi is unable to effectively run its own businesses or integrate with NBC, then it will find itself significantly handicapped in achieving the level of exit returns it wants,” said a high-level executive close to the talks. “This is Revised Business 101-GE-style.”
In recent days, NBC has added minimal cash to its offer to give Vivendi a 20 percent stake in the new company, valued at about $50 billion, sources said. That implies about $35 billion value for NBC, about a $12 billion value for VUE and more than $2 billion of assumed VUE debt-just a fraction of Vivendi’s total $13 billion debt.
Sources say GE/NBC would give VUE a nominal $1 billion or so in upfront cash and assume $2.2 billion in VUE debt. It would provide up to a combined $3 billion in cash and GE stock by the third year and a cash-out by the fifth year, during which Vivendi’s upside is determined by a performance-based formula applied to the combined assets. GE has said it will not provide Vivendi with any exit value guarantees. In other words, in what appears to be a bold but justifiable deal framework, GE and NBC are going to hold Vivendi accountable for the value, performance, pitfalls and pluses related to VUE assets right up to the day it cashes out.
That certainly is a dramatically different way to structure such a merger, and it fully and creatively reflects lessons learned from the still-struggling AOL Time Warner merger and Walt Disney Co.’s acquisition of Capital Cities/ABC. This is all not to mention Vivendi’s acquisition of USA Networks Inc. and Seagram-Universal, which, along with other forces, has depressed the company’s overall market value and stock price by 70 percent.
Clearly, GE and NBC are taking a measured gamble on the kind of vertical integration play that seems to have doomed as many media players as it has buoyed.
But in an effort to repeat others’ past mistakes, GE and NBC are rewriting the media industry’s deal-making handbook-for the better. Now the question is whether Vivendi Universal is courageous enough to do the same.