Lights! Camera! Action!

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

The price GE paid puzzles some observers. “Everybody is more optimistic about running a movie company than they deserve to be, and as a result they end up overpaying,” says Londoner. But “the one thing you know about [NBC chairman and CEO] Bob Wright and the whole GE crowd is that they aren’t mesmerized by Hollywood.”

Why, then, might GE have offered a higher multiple than seemed necessary?

For one thing, there were other bidders, offering deals with more cash. Among GE’s rivals were one consortium led by Seagram heir Edgar Bronfman Jr. and a second called Universal Partners, whose offer was designed by former Seagram CFO and onetime Universal Studios co-chairman Brian C. Mulligan. Both consortia reportedly proposed to pay more than $11 billion, nearly all in cash.

“Once Vivendi decided it was willing to take consideration other than cash,” says Mulligan, “it was difficult for financial buyers like us to compete with a strategic buyer—especially one as formidable as GE.”

Another huge factor was that GE had decided it needed to integrate movies and TV. With Disney owning ABC, Viacom controlling Paramount and CBS, and Fox Entertainment (films and TV) belonging to Rupert Murdoch’s News Corp., NBC is the only network not affiliated with a studio. A property like Universal might not be available again for 10 years, explains analyst Marvin Roffman of Philadelphia-based Roffman Miller Associates Inc. “That’s the business [GE] wanted to get into, and to be able to do it in one fell swoop, they had to pay a high price,” says Roffman.

Sherin told analysts that the EBITDA multiple shrinks to about 10 if savings from synergies are realized. Of course, many an acquisition has foundered on the quest for synergies that evaporate on close examination. In this case, some of the synergies are expected to stem from the range of familiar cable brands coming together under the NBC-Universal umbrella—USA Network and Sci Fi, in addition to Bravo, CNBC, PAX, The History Channel, and others—all benefiting from access to “content” from a growing Universal library that already contains more than 5,000 titles. The combination also takes GE’s existing entertainment businesses toward a 50-50 mix of fee- and advertising-based revenue; before, nearly all of NBC’s revenue was ad-based.

While few deal-making experts will criticize GE publicly, some scoff privately at its supposed efficiency in M&A pricing. In the entertainment business, GE has yet to live down its 2002 price of $2.7 billion for number-two Spanish-language broadcaster Telemundo—at a cash-flow multiple of 45. And later that year it added Bravo for $1.25 billion, a price analysts said represented 27 times EBITDA. (Neither deal was included in the list GE shared with analysts.) “A little secret on Wall Street is that you want to be a seller to GE,” says one GE watcher, who asked for anonymity. “They pay full value.”

Stock on the Barrelhead

Another reason GE paid up was that it didn’t want to offer cash. Debt-laden Vivendi was drawn to cash offers, so GE, which chose to pay in stock, agreed to assume $1.6 billion of debt in the deal, and structured issuance of $3.8 billion in GE common shares so that Vivendi could liquidate them immediately. The terms will give Vivendi 20 percent of the new NBC Universal—valued by the parties at $8.3 billion—and allow Vivendi to begin cashing in that stake in 2006, with GE holding first rights to acquire Vivendi’s NBC-Universal holding.

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