• by Diane Mermigas , March 25, 2008

General Electric Chairman Jeff Immelt emphatically denies plans to sell NBC Universal, pointing to cable network and international growth as offsets to its fourth-place broadcast TV network and its increasing vulnerability during the ad recession. But 2009 could tell another tale.

Although speculation about NBCU's sale has dogged the global conglomerate for decades, Immelt recently responded with an unusual round of public comments and a ringing endorsement in his annual shareholder letter. NBCU should grow overall earnings 10% and international revenues 20%, Immelt said--thanks to shifting its focus from broadcasting to cable, film and digital media, which represent more than 80% of its earnings, growing 15% annually.

Immelt denies any future sale, writing in GE's recent annual report: "We are in a good cycle, with momentum around the Beijing Olympics, the U.S. elections, and the 2009 Super Bowl." However, after NBC's January Super Bowl telecast, things could get dicey enough to prompt dramatic changes, especially if the broadcast network fails to develop new prime-time hit series that can generate a full range of online streaming, DVD, international syndication and cable revenues.

By 2009, NBCU will have completed $1 billion-plus in cost savings without this year's presidential elections ad spending, which collectively will boost 2008 profits by 15%. Even with its Olympics telecasts, NBC ratings could decline another 2%, according to JP Morgan analyst C. Stephen Tusa.

Macroeconomic headwinds will depress the overall ad spending, which comprises nearly half of NBCU's total revenues (compared to 25% of its big media peers). Although Immelt touts NBCU's revenues outside the U.S. (20% of its overall total, growing at 20% annually), Tusa says international expansion cannot come fast enough. NBCU trails its major media conglomerate peers.

Tusa's reality check on NBCU is rooted in financial details that GE does not disclose. It has led him to conclude that NBCU is worth more as a systematic breakup, with assets fetching as much as $45 billion, or about $15 billion more than implied in GE's languishing stock price.

This deeper look at NBCU's financial performance, coupled with several recent developments, provides an intriguing rationale for this eventual scenario. For instance, NBCU's recent hiring of JP Morgan Chase to handle the sale of its owned TV stations in Miami and Hartford will leave it with eight English-language outlets in the top 10 markets--the smallest of any broadcast network group. It is indicative of the industry's content distribution shift to the Internet and away from reliance on local TV stations, although some speculate that NBCU still could buy long-sought-after KRON in San Francisco from Young Broadcasting.

NBC's owned TV station group is worth an estimated $5.7 billion, or 11 times $515 million in 2008 operating earnings, although revenues are expected to decline to their lowest level of about $1 billion next year. That still eclipses the NBC TV entertainment network, valued by JP Morgan at $626 million, or eight-times $78 million in 2008 operating earnings, which have nose-dived from a record $900 million-plus. That makes the TV station group an attractive acquisition target--even for a reticent private equity company--based on their profitable local news operations, low capital expenditures, and reasonably high 35% earnings margins.

Although a TV station's profitability can approach 50% with network-funded programming, a broadcast network no longer needs TV stations to distribute content. The cost of producing an estimated $3.5 billion in programming is best offset by revenues from a broad array of outlets--from online streaming video and DVD to on-demand and advertising.

In order for NBCU to stay in the game, it has to rapidly increase its global digital content stature and revenues. Even Immelt concedes that its $500 million in international cable program revenues are a minor slice of the $100 billion global market for cable and a $350 billion media market overall. Although the financial importance of the NBC TV network has deteriorated to being "immaterial," its ratings performance still drives industry perceptions and the company's advertising demand, Tusa said. It will take time to change that.

The company's streaming content strategy, NBCU 360, generates the same $1 billion-plus annual digital revenues as its big media peers, and tops the broadcast network by generating more than $100 million in annual operating earnings. But its digital assets are valued at only $1.2 billion, about the same as NBCU's theme parks. NBCU's news and information assets are more of a hidden gem, generating $640 million in operating profits this year, and valued at nearly $11 billion.

Tusa's sum-of-parts analysis that privately values NBCU at $55 billion, based on $3.9 billion in total operating profits, makes a case that the company's other two largest businesses could be better leveraged as stand-alones. He values NBCU's cable entertainment networks at nearly $24 billion, or 17 times this year's expected $1.4 billion in operating earnings (one-third of the company's overall profits), and its filmed entertainment at more than $11 billion, or 12 times an estimated $934 million in operating earnings. "The higher-growth cash-generating businesses would be left to be valued on their own potential, instead of being pegged with the diversified media multiple generated by the lagging broadcast business," Tusa said. That sounds a lot like the pre-Viacom/CBS split argument to me.