NBC Universal, the entertainment arm of GE (NYSE:GE) which is 20% owned by Vivendi, is worth $30 billion. That is the figure that GE and Comcast (NASDAQ:CMCSA), the cable company that intends to take control of NBCU agree on. Vivendi may be willing to take $6 billion for its piece of NBCU and if so, the valuation is to some extent academic. The $30 billion will also decide how much money Comcast will put into the joint venture that will own NBCU.
The Wall Street Journal has made the point that Vivendi could walk away from selling its stake and ruin the entire transaction, but it is hard to see what the French company would gain from that.
NBCU will have revenue of just over $15 billion this year and operating income of about $2.4 billion. The company has no debt. Entertainment giant Viacom (NYSE:VIA.B) has a market cap of $19 billion and debt of nearly $7 billion. Its annual sales are about $14 billion and its operating income was $2.5 billion in 2008. That would make the NBCU valuation in line with a publicly traded company of similar size and business scope.
The real issue with the Comcast plan to take control of NBCU and GE’s desire to divest it is why anyone would assume that the entertainment company will do any better with Comcast management than it has done with GE executives at the wheel. NBCU’s earnings have been in line with the rest of the industry as it has gone through the recession. It has already cut costs and laid off workers. A great deal of its performance relies on the success of it TV ratings and movie box office receipts as its earnings from the Olympics last year show. In short, there is nothing that new management is likely to be able to do to improve results.
There is an odd theory that because Comcast is the largest cable company in the US that it will be able to get more NBCU content to its customers using its broadband and TV delivery infrastructure. That is hardly the case. The federal government will be watching Comcast to make sure it treats other entertainment firms at least as well as NBCU. Comcast would risk a run-in with antitrust authorities if it acted otherwise.
Many M&A transactions are based on the premise that a new owner can manage a company better than the old one. In the case of NBCU, it is hard to see how that will work.
Douglas A. McIntyre
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