• by Diane Mermigas , February 22, 2008

General Electric CEO Jeff Immelt was adamant in December when he declared the multinational conglomerate "is worth more with NBC as part of it than it would be without NBC." It's a good way to grow 10% to 15% in 2008. "This is the wrong time to think about exiting," he said. That should have halted the incessant speculation about the sale or spinoff of NBC Universal and its assets. But Wall Street remains convinced that jettisoning NBCU is the way GE will realize the biggest returns on its investment. JP Morgan analyst C. Stephen Tusa is the latest to lead that chorus, recommending that a piecemeal sale can generate $10 billion to $15 billion more than the $33 billion value implied for NBCU in GE's sluggish stock price.

The public sale of NBCU's broadcast, cable, film, theme park and Internet businesses could collectively generate at least $45 billion, or 14.5 times estimated 2008 earnings. The private market transaction value of assets would carry a premium that would boost the potential total to over $55 billion. Tusa estimates that an underleveraged NBCU could afford to take on as much as $6 billion in debt.

It is a bitter irony that media conglomerates, such as GE and Time Warner, have discovered that breaking up assts is the best way to maximize shareholder value. However, changing business fundamentals and an all-digital environment make that option increasingly difficult.

Tusa suggests the first NBCU assets to go could be its 10 owned TV stations, which he values at $5.7 billion, and its network entertainment--valued at a mere $626 million, based on estimated 2008 operating income. Its entertainment cable networks could be worth as much as $24 billion, its news and information assets nearly $11 billion, its film assets could be valued at $11 billion, and its theme park and digital assets each about $1.5 billion.

Whether asset sales turn out to be GE's end game, NBCU is managing itself for the digital future. It will dispense with the expensive series pilots and costly upfront ritual, opting for individual ad client and media buyer meetings. It will shift from a limited prime-time season in favor of a continuous 52-week program schedule. These are just the baby steps in a reinvention of the broadcasting business.

In fact, NBCU is in the precarious position of having the public perception of the company predicated on the tumultuous state of prime time, where NBC has languished in fourth place. The fall corresponds with an operating profit decline from nearly $1 billion annually to about $100 million today.

More than one-third of NBCU's profits are powered by the company's entertainment cable networks, with their margin growth of greater than 50%. The cable networks are direct beneficiaries of broadcast's struggles; their annual profit growth averages 15%. Ad spending on cable networks is expected to grow 5.2% this year, off 6.4% growth in 2007. Broadcast industry ad sales should grow 4.1% this year, compared to a 3.4% decline in 2007.

Tusa says entertainment cable networks, film, news and information cable, Hispanic programming, international expansion and digital are the growth drivers contributing to 80% of earnings with aggregate 30% margin growth. NBCU's more tenuous NBC TV Network prime time, local TV stations and theme parks are value businesses contributing about 20% of overall operating profits and generally flat revenues.

NBCU's company-wide 2.0 initiative is as dependent on $1 billion-plus in savings and forging new digital revenue streams. It recognizes that the legacy business models and structure are a major impediment to adopting a digital construct, although programming remains the biggest, fixed expense. Much of the 2.0 initiative centers on better monetizing the 80% of its content. Broadcast dependence on election and Olympics-related ad spending is a misleading indicator of strength, which abates in off years. Cost savings and political ad spending combined added 15% to last year's profits, Tusa said. Acquisitions have boosted profits by 12%.

NBCU--and all media conglomerates--must seize what Tusa says is a $350 billion global media opportunity growing at 5% annually, 50% of which is outside the U.S. NBCU says it will improve its global business, where it lags behind its peers. International revenues were nearly $3 billion last year, or about 18% of segment sales--virtually unchanged since merging with Vivendi Universal. CEO Jeff Zucker is targeting 20% growth to $5 billion in international sales by 2010. He's focusing on improved content distribution, expanded local TV and films, digital growth and high-margin global licensing for theme parks.

The biggest, required improvement is in bolstering NBCU's 45% revenues dependence on interactive ads and drilling deeper into cable, online and theme-park verticals. Some 55% of its sales are now linked to annuity-like cable affiliate fees, licensing deals and direct-to-consumer content, such as films and home video. Revenues from new technology, such as video on demand, HD programming and interactive TV, are just ramping.

Management is also targeting 12% long-term profit growth driven by its core channels, new platforms (Universal HD, Chiller, Sleuth and joint ventures) and adjacencies in digital and international regions. The best example of core channel growth: USA Network's successful development of original series, including new episodes of "Law and Order Criminal Intent," which replay on broadcast.

Tusa's selloff thesis is an uncommon examination, given the limited access to NBCU financials buried deep within GE's global portfolio. It is laced with urgency about selling before the underlying metrics and valuations change. The second half of his voluminous report reads like a primer on the traditional television and film businesses without specifics about new business models--because no one has them. That is the biggest challenge to any well-intended analysis or selloff of NBCU or its media peers.