Wounded Peacock: GE Debates Selling, Spinning NBCU

General Electric's pending decision to retain total or partial ownership of NBC Universal could hinge on radical changes to its weakest financial links, including its ad-dependent NBC broadcast network and TV stations, which could boost the media company's overall revenues and value.

One option may be to convert the network into one or more branded entertainment multimedia platforms supported both by paying consumers and advertisers, much like NBCU's successful cable networks.

Getting NBC out from underneath the deteriorating broadcast model, where it may never leave fourth place in the ratings, would theoretically make it more valuable to GE. "NBC has been a share loser in a segment of the TV market that itself is losing share," Bernstein analyst Steven Winoker observes in a new client report.

This is especially important now, as GE wrestles with its own financial hardships and asset dispositions. GE is rethinking its plans for NBCU as Vivendi Universal decides whether to unload its 20% stake in the media giant during an annual November options window. In a recovering market, most analysts expect GE to buy back the 20% stake or flip it to another third-party equity investor (Providence Equity Partners has been mentioned) in preparation to publicly spin off or even sell all of NBCU (to the likes of Time Warner).



NBCU has lost more than one-third of its valuation high in better times, even as its popular cable networks and aggressive digital initiatives work to offset much of what could be permanent losses in its broadcast businesses.

NBC has gradually been moving toward dual revenue stream models by moving more of its content to cable, mobile devices and streaming online -- such as co-owned Hulu is considering how to leverage its newfound success by charging subscriptions or for pay-per-view content, although it generally zaps $920 per viewer in ad revenues that would otherwise go to the broadcast networks, according to Soleil Securities analyst Laura Martin.

New media is still a double-edged sword for NBCU, whose digital businesses will post an annual loss of nearly $200 million this year. Given its current financial pinch, NBCU could seek to take on strategic partners, such as Google, which could assist in developing its overall online ad revenues.

The need for such bold moves is reinforced by a number of recent developments including the loss of $2 billion (or nearly one-quarter) from the four broadcast networks' upfront sales this year. Much of those monies will not return in the weak scatter market or even in election-bolstered years. A detailed analysis by Credit Suisse's Spencer Wang concludes that factors such as a potential 5% increase in Big 4 network unit prices and a continuing 5% in audience erosion could result in another 6% decline in overall 2010 advertising revenues.

The repercussions are especially dire for NBC TV. NBC's $1.5 billion in estimated broadcast upfront sales declined 21%, selling 11% less inventory than prior years, Wang said. It was the lowest dollar commitment of the Big 4 broadcast networks. NBCU's branded cable networks are expected to outperform an average 3% growth in cable network advertising, Wang estimates for 2010.

NBCU's long-term financial outlook is muted, at best -- despite a minimal uptick in 2010, thanks to improved auto advertising, elections and the Vancouver Winter Olympics.

NBCU's overall revenue growth, which will drop a record 10% this year, will never gain more than 4% annually over the next five years, but can maintain high-end margins of around 18% if it remains focused on multi-revenue business, such as cable networks, which are projected to grow nearly 6% annually long-term. These shifting economics will be especially important in future bidding for expensive events, such as NBCU's long-standing exclusive Olympics telecast rights.

Digital revenues cannot be generated fast enough to offset advertising losses and the perpetual decline in network ratings and in station revenues. NBC's local stations generate 11%, and its broadcast network generates 25% of overall revenues, but only a combined 14% of earnings. Although its popular cable networks generate only one-third of overall revenues, they account for more than 60% of NBCU's overall earnings, according to Bernstein Research.

JP Morgan analyst Stephen Tusa says normalized contribution by NBC TV network and stations will shrink to $893 million of NBCU's overall $2.56 billion in operating income in 2009. The lion's share, or $2.34 billion in operating income, will be generated by its cable networks; the film studio and theme parks combined will generate $795 million in operating income. On a sum-of-parts basis, that makes the NBCU cable networks about $22 billion on NBCU's total $33 billion valuation, while the NBC TV network and owned stations comprise about $6.3 billion, films and parks $5.4 billion and its digital operations about $250 million, Tusa estimates.

Bernstein's Steven Winoker has estimated NBCU's value between $21 billion and $23 billion. Both Winoker and Tusa say GE will seek to acquire Vivendi Universal's 20% stake in the media company for about $4 billion or sell it to another third-party investor. Vivendi wrote down the value of its NBCU stake to $5 billion from $8 billion last year.

Despite GE management's repeated comments to the contrary, the reasons for selling NBCU are apparent. GE must raise equity capital not only to buy the 20% stock in NBCU, but to fund reinvestment and debt of its diversified core businesses including GE Capital, whose financing of weakening media entities is part of its own economic squeeze. GE management barely mentioned NBCU in an analyst meeting Sept. 17 that focused on ROI in its core energy, aviation, healthcare, advanced technologies and research businesses.

Sterne Agee analyst Nicholas Heymann says GE's lack of available cash and the difficulty of finding a new equity partner, "given NBCU's current predicament," could force it to consider other alternatives. Selling Vivendi's 20% stake directly to the public market would be challenging.

GE could potentially sell Universal Studios -- possibly to Time Warner or to Vivendi -- for between $8 billion and $10 billion, which would yield the funds to buy back Vivendi's stake, Heymann said in a note Friday.

Clearly, Wall Street underestimates the long-term benefits of transforming and leveraging NBCU's weakening broadcast holdings rather than selling them at depressed prices. Overall, such factors present GE and NBCU with a challenge and opportunity -- to pursue revolutionary means to a profitable end.

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