Facing its toughest uphill battle in decades, even blue-chip king General Electric has resorted to that strategy, creating an $8 billion global partnership with Abu Dhabi-based Mubadala Development Co., which is in the process of buying enough discounted GE shares on the open market to become one of the conglomerate's top 10 institutional investors.
GE and Mubadala each will invest $4 billion in equity over three years to a new commercial finance venture. Mubadala will invest up to $200 million in GE Industrial Investment Partners, the new partnership of global investors providing capital to companies working in the transportation, health care and energy fields. GE will expand its successful green efforts with an additional $50 million for global investments in clean technologies and in companies that represent alternative energy sources. Regulatory approval is needed for the pact that must be hammered out of the "framework agreement" announced Tuesday.
The proposed deal is as brilliant as it is unsettling, and it could impact GE's anticipated spinoff or monetization of its NBC Universal subsidiary. It is another stunning example of how the economic squeeze has increasingly driven some of the biggest U.S. companies to tap eager Middle Eastern, Asian and other foreign investors. Mubadala, which is controlled by the government of Abu Dhabi, has taken a $1.3 billion stake in the Carlyle Group and a $622 million stake in AMD. The Abu Dhabi Investment Authority has acquired a $7.5 billion stake in CitiGroup, and the Abu Dhabi Investment Council has acquired a 90% stake in New York's iconic Chrysler Building.
GE CEO Jeff Immelt is moving swiftly to reduce the company's exposure to volatile financial and legacy-mired traditional businesses. So far, it has revamped its global portfolio with more than $55 billion in non-core asset sales and nearly $90 billion in high-tech, fast-growing energy and bioscience acquisitions. Immelt says he is committed to recalibrating the portfolio to 40% financial and about 60% industrial-infrastructure interests by 2010.
With roughly a $276 billion market cap, GE recently unloaded its Plastics division and is selling off assets such as its $30 billion consumer credit card business amid declines in its quarterly earnings and lower annual revenue and earnings guidance. GE buffeted a reported 6% decline in second-quarter earnings on Friday by announcing plans to spin off its entire consumer and industrial unit. GE has increasingly relied on robust growth from its infrastructure (providing pricey locomotives, jet engines and power turbines to emerging markets) and universally significant health care businesses. Immelt says GE's international growth prospects are critical to offsetting the domestic downturn.
NBCU's growing interests in online video, cable networks and digital entertainment make it an attractive asset to international investors in emerging markets that lack such consumer-friendly resources. They are infusing necessary cash into and buying up U.S. entertainment and media. For instance, Reliance Entertainment (part of an Indian conglomerate controlled by the telecommunications mogul Anil Ambani) is building its own $10 billion entertainment empire by financing independent producers Chris Columbus, Brad Pitt and George Clooney, and is negotiating with Steven Spielberg.
Although Immelt reiterated during a second-quarter conference call Friday that it has no plans to sell NBCU, veteran GE watcher Nicholas Heymann, of Sterne Agee & Leach, says the spinoff is imminent after next month's Olympics. It is one of the major no-growth asset sales necessary to reset GE's corporate tax base and achieve its overall restructuring plans before the company's annual year-end meeting with shareholders. The Mubadala investment is a way to keep GE stock strong during asset divestitures and expand the company's growth prospects in emerging markets.
The new alliance also poses the prospect of GE spinning off NBCU into a stand-alone entity that could merge with Time Warner or John Malone's Liberty Media, in which Mubadala could have the maximum foreign investment allowed by law. Alternatively, a number of analysts believe that NBCU assets--including cable networks, broadcast network and TV stations, Universal filmed entertainment and theme parks--will be sold piecemeal for the highest price to specialized buyers backed by foreign investors. The sale of NBCU's separate four or five core businesses could sell for more separately than the company's collective estimated $35 billion sales price, which would be subject to taxes. For starters, NBCU reportedly is aggressively shopping its theme parks, NBC Shop, Ion Network and television stations.
GE management may have discreetly shown its hand by allowing private-equity firms Blackstone and Bain Capital to finance NBCU's recently $3.5 billion acquisition of The Weather Channel. GE could have financed from within.
Cable is the only NBCU business expected to demonstrate certain recessionary resilience this year. NBCU reported virtually flat profit on a 7% rise in second-quarter revenues, missing projected growth of 5% profits on 10% revenues. Having posted only about 3% growth in first-quarter revenue and profits, the third quarter looks even weaker. Heymann estimates that NBCU will grow operating income 6% to $3.3 billion on a 16% increase in revenues to $17.8 billion in 2008 bolstered by Olympics and cable, while reverting to more moderate 5% growth next year.
Little wonder, then, that NBCU CEO Jeff Zucker and Ben Silverman, co-chairman of NBC Universal Entertainment, have conceded that they are managing "for margins and not for ratings" as reflected in major cost-cutting, producing fewer shows and rampantly recycling product. But it is hard to believe that foreign investors don't salivate at the thought of boosting their own new fortunes with NBCU's movie studios, theme parks and cable channels--entertainment gems it would take years to develop. And that could create the most lively media show of the year: a bidding war for NBCU by an Abu Dhabi investor, John Malone and Time Warner. You can already see the grin forming on Immelt's face.