Lights! Camera! Action!

Buying Universal puts GE in the movie business. Its plan for synergies might make a good screenplay.

In the film industry, General Electric Co.’s $14 billion deal for Vivendi Universal’s entertainment assets has created all the buzz of an impending blockbuster. How will GE’s famous finance discipline play, movie mavens want to know, in an industry not exactly known for the rigor of its accounting?

Although GE has run the NBC television network for years, film production involves “dealing with 20 bets of $75 million to $100 million each year,” says David Londoner, a retired entertainment analyst who now serves on two media-company boards. And a big part of a moviemaker’s challenge, of course, is to rein in the hyperpriced star system.

Given the vagaries of the film business, it is unclear when, or whether, GE might extend its success with NBC across the new NBC Universal division. The deal, if completed, would create a unit with $14 billion in annual revenues from movie and TV production, a large film library, and theme-park interests, along with network and cable operations. But a look at the way GE valued Universal, and the terms GE and Vivendi chose for the combination, suggest that GE’s entry into this new business will require some draconian financial work.

The price paid for Universal is clearly a subject of pride at GE. “We’re pretty excited about the valuation,” CFO Keith Sherin told analysts in a postannouncement conference call, calculating the multiple at 14 times Universal’s estimated 2003 EBITDA (earnings before interest, taxes, depreciation, and amortization). (GE declined to answer specific questions from CFO for this article.) How good a multiple is that? Hard to say, given that some comparables Sherin cited were acquisitions completed at the height of the bull market, starting with Vivendi’s 2000 EBITDA multiple of 22.6 for Seagram (see “The Price of Admission”, at the end of this article).

While the immediate financial impact on GE would be neutral, said Sherin, the deal would be accretive to earnings per share by 1 cent to 2 cents in the second year. GE predicted that it would realize $400 million to $500 million in synergies after the acquisition, and estimated that 75 percent of the synergies would come from cost savings, with the rest in revenues.

Why Overpay?

Just as the glamour of entertainment properties tends to increase valuations beyond the fundamental worth of the assets, so does GE’s reputation as a financial powerhouse tend to have a halo effect. “They’re incredibly hard-core, numbers-oriented people,” says David Larcker, professor of accounting at the University of Pennsylvania’s Wharton School. Finance at GE, he adds, “tries to drive out all the fluff and the hubris” when valuing targets. Beyond that, GE is known for holding finance executives responsible for M&A forecasts. The company will revisit the terms later to determine “what the targets were, and how close you were,” he says. “If you innovate and you win, you’re rewarded. If you don’t, you’re penalized.”

Still, there’s little excitement outside GE about the multiple it paid. “If you look at the pure economics of the movie business, taking into account library and current production, realistically these businesses ought to sell at 10 to 12 times cash flow,” says Londoner. The multiple for Universal’s theme parks—which compete against The Walt Disney Co.’s—should be even lower, perhaps 6 times EBITDA.


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