Commentary

Is Now The Time To Sell NBCU?

General Electric is more likely to sell NBC Universal as a result of the financial squeeze reflected in its decision this week to slash its third-quarter and full-year estimates, recapitalize and make its asset portfolio less dependent on vulnerable financial services.

The sale of assets for cash is generally grim these days, given the lack of sound valuations and available credit. The exception is self-financed strategic buyers with strong balance sheets looking to opportunistically pluck choice properties at distressed multiples. It is unknown just how low GE would go with NBCU's value--broadly estimated at $33 billion or lower intact (based on GE's sluggish stock price), and between $45 billion and $55 billion if its assets were sold piecemeal, according to some experts.

A public sale of NBCU's cable, broadcast, film, theme park and Internet businesses could garner more than 14 times current earnings.

The more salient question may be whether GE considers it prudent to retain NBCU's advertising-supported, growth-constrained businesses over the next 18 months in a weak and volatile market climate. (See "On Media," Sept. 25 column) GE CEO Jeff Immelt said Thursday that the globally diversified conglomerate is taking decisive measures to make itself "safe" in a time of unprecedented risk. Many of the measures announced were intended to improve the company's liquidity and stability in light of its dominant GE Financial Services and the vulnerability of the overall financial services market.

Even after the government's proposed controversial $700 billion bailout, the fundamental housing crisis cuts deeply into the consumer and advertiser spending that fuels media.

NBCU's ability to deliver growing profits to GE is largely dependent on quadrennial presidential elections and Olympics boosts. NBCU's fiscal vulnerability is obvious: It is expected to deliver nearly flat $3.1 billion in operating profits on $17.8 billion in sales in 2008. It also has one of the lowest average five-year growth rates through 2009 for revenues (6.6%) and operating earnings (4%) of GE's core businesses, according to Sterne Agee.

Against that problematic backdrop, and with the profitable 2008 Olympic Games behind it, GE may be willing to sell NBCU at a reasonable valuation. Although its prime-time broadcast network fortunes have been looking up, more than one-third of NBCU's profits are powered by the company's entertainment and news cable networks.

That is what makes NBCU attractive to Time Warner, which has the cash reserves and free cash flow to purchase, thereby strengthening its focus as a pure-play content conglomerate. If Time Warner manages to sell AOL for around $10 billion to Yahoo or Microsoft, all the better. And there's reason to believe that a Yahoo-Microsoft roll up of some kind remains plausible, especially with activist investor Carl Icahn now on the Yahoo board.

Launching that merger and acquisition chain of events with the long-expected sale of NBCU would provide an upside catalyst for GE's own financial concerns. In a shift to global infrastructure and from old-line industrial businesses, GE has sold its plastics division, but is still struggling to sell its private credit-card and consumer appliance holdings. GE's recent $8 billion partnership with Abu Dhabi-based Mubadala Development Co., on track to become one of its top institutional investors, indicates ambivalence about GE being able to fuel its own double-digit growth.

The big hit that GE Capital could still take from its hedge fund and other variable financial businesses is prompting GE to conserve its cash (by halting its stock buybacks) and may hasten the sale of NBCU and other assets. Just last week, GE was telling shareholders that its $87 billion commercial real estate and $79 billion global residential mortgage portfolio are long-term, diversified and with low delinquencies--for now.

An NBCU deal would have implications for other media companies seeking firm revaluation for their own properties, considered as important as reigniting the flow of credit and liquidity. Much of the angst over the proposed $700 billion financial bailout has been the lack of certainty about how toxic banking assets will be valued, bought and sold to benefit taxpayers.

Berkshire Hathaway CEO Warren Buffett attempted to assign a market value to Goldman Sachs with a confidence-boosting $5 billion investment with 10% interest and other protections earlier this week--a strong suggestion to the federal government that market prices are not as risky as generally perceived. Such individual investments could help re-set asset valuations in media and other industries, although the fear on Wall Street is that self-funded investors may hold back, hoping to snare properties at more depressed prices.

Such was the case this week when Pimco refused an offer to acquire Morgan Stanley bonds with 25% yields. This same value-destructive game of Russian roulette could also play out among media, entertainment, telecommunications and Internet properties. NBCU could turn out to be a test case.

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