General Electricâs Economic Miracle
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General Electric's Economic Miracle
Dan Ackman, 09.03.03,
NEW YORK - For Vivendi Universal, it's hard to know if it made a profit on the deal. The entertainment assets it intends to merge with NBC, a unit of General Electric, were sliced from what it bought from Seagram: They kept the music business and sold the Seagram liquor business in 2000. Vivendi paid $34 billion for all the assets--but it paid it in shares, which turned out to be worth much less than they seemed.
But for GE (nyse: GE - news - people), the agreement to join its broadcast and cable television networks with Vivendi's (nyse: V - news - people) movie studio and cable networks looks like a huge win. If it is completed, the conglomerate is poised to own 80% of a joint venture called Vivendi-NBC. In exchange, it will give up $3.8 billion in cash and will assume $1.6 billion of Vivendi's debt--though not right away. Vivendi seems to believe that its stake in the joint venture is worth the $14 billion it was looking for. If it's correct--and why would GE argue?--then the joint venture would be worth $70 billion and GE's share would amount to $56 billion. That's more than News Corp. (nyse: NWS - news - people) and nearly as much as AOL Time Warner (nyse: AOL - news - people). It also represents a huge lift for GE, which bought NBC for $6.3 billion in 1986.
There is, of course, reason to doubt that the joint venture is worth $70 billion. Porter Bibb, managing director of MediaTech Capital, calls going the joint-venture route "a wonderful rationalization," meaning Vivendi can assign whatever value it likes to its piece of the joint venture. Bibb, who long predicted that NBC would prevail at the auction, credits Vivendi Chairman Jean-René Fourtou with selling enough assets already that he didn't need cash up front for the entertainment units.
In the current deal, Fourtou emerges with a business that has significant upside potential, Bibb says. It gets part of a leading entertainment franchise--and one managed by GE rather than one burdened by a grandiose media mogul at the helm. Fourtou's goal has been to sell nearly $16 billion in assets to pay down debt.
GE, meanwhile, without a substantial cash payment, winds up with an entirely new, vertically integrated entertainment business that combines the NBC television network and the cable networks--USA Network, Sci-Fi Channel, CNBC, MSNBC, Bravo and Trio--with Universal Pictures, Universal Television, stakes in five theme parks and Spanish-language television broadcaster Telemundo. Among the television shows that Universal produces is Law and Order, whose producers are seeking a $550 million-per-year deal. By owning the company, GE will pay less (although the show's creators, led by Dick Wolf, are still in for a big payday). GE also gets a bigger position in cable, which seems crucial now that the networks account for just 40% of the television audience--down from 80% when GE got into the game. While Universal has historically rained trouble on its owners, GE may be able to quell the curse (see: "A Curse Haunts Firms That Acquire Universal").
In terms of solid commitments, the deal offered by Edgar Bronfman Jr. and his associates, which included Cablevision (nyse: CVC - news - people), certainly looked superior, notes Ken Marlin, managing partner of Marlin and Associates, an investment bank that specializes in media. They offered, for starters, $8 billion in cash up front. Like GE, they envisioned an IPO down the road.