Vivendi Makes Wright Choice in NBC Deal

Updated from 1:18 p.m. EDT

Another multimedia conglomerate, coming right up.

Now that Vivendi Universal (V) and General Electric (GE) have made a nondefinitive agreement to merge their entertainment assets, GE's NBC will once again resemble its broadcast television peers.

Not only that, but NBC could conceivably deliver on the original promise of Vivendi Universal: That throwing together various media assets into one big pot could actually create some value.

It's too early to tell whether NBC chairman and CEO Bob Wright, slated to lead the new company, will actually deliver. Or whether the deal to merge NBC and Vivendi Universal's U.S. entertainment subsidiary, Vivendi Universal Entertainment, will actually be consummated.

But Wright will likely have a better chance than did Vivendi Universal's ousted chairman, Jean-Marie Messier, at achieving multimedia-synergistic success -- that is, effectively throwing one's weight around in the U.S.-centric media environment.

Assuming the deal goes through, NBC will be bulked up like its broadcast rivals, who morphed into multimedia conglomerates years ago. CBS is now part of Viacom (VIAB), and ABC is part of Disney (DIS). Like both of them, NBC will now be tied to a movie studio and film library, and like Disney will have its own set of theme parks, for better or worse.

Vivendi Universal's shares rose $1.31 to $18.21 Tuesday, while GE's were up 43 cents to $30.

Crusading

The 8% jump in Vivendi Universal's share price indicates investor confidence that the French media conglomerate has made a significant step forward since the debt-reduction crusade begun after Messier's forced departure last year.

Indeed, Vivendi Universal CEO Jean-Rene Fourtou said in a statement Tuesday, "Upon the closing of this transaction, VU will have achieved its asset divestiture program goal of selling 16 billion euros of assets by the end of 2004."

But the financial outlook remains somewhat foggy. In addition to the aforementioned tentative nature of the deal, VUE shareholders -- chiefly Vivendi Universal and Barry Diller-led InterActiveCorp (IACI) -- will receive $3.8 billion "cash consideration from the monetization of GE's commitment to issue GE stock" and $1.6 billion in "debt reduction," according to Vivendi Universal and GE's statement.

It's unclear how these terms, along with an ownership structure that gives Vivendi Universal 20% of the merged entity, match up to the French company's reported goals of reaping $14 billion from its VUE assets, which include Universal Studios, Universal-brand theme parks and the Sci Fi Channel and USA Network programming services.

But here's a rough attempt at valuing the deal. The merged entity, according to GE and Vivendi Universal, would have 2003 earnings before interest, taxes, depreciation and amortization of $3 billion.

Let's start with the assumption that the company would be valued in the neighborhood of peers such as Disney, Viacom, AOL Time Warner (AOL) and Fox Entertainment (FOX), the U.S. entertainment subsidiary of News Corp. (NWS).

Based on data borrowed from a recent research report issued by J.P. Morgan analyst Spencer Wang, this basket of stocks has an average enterprise value -- market capitalization, plus debt, minus cash on hand -- of 12.9 times 2003 EBITDA.

So, applying that EBITDA multiple to the hypothetical VUE+NBC, one arrives at an enterprise value of $38.6 billion.

Outsiders don't know how much cash and debt VUE+NBC would end up with, but in our collective basket of stocks, equity accounts for 84% of the enterprise value. Applying that plausible figure VUE+NBC's enterprise value, one ends up with a market cap of $32.4 billion. Vivendi Universal's 20% share of that market capitalization, thus, would amount to $6.5 billion.

Add that figure to the $3.8 billion cash and $1.6 billion in debt reduction -- it's unclear whether that debt is simply being transferred to the new entity, and what impact that might have on these calculations -- and one ends up with a deal that values the VUE assets at about $12 billion.

Given the host of hypotheticals in this exercise -- not to mention GE and Vivendi Universal's incomplete dealmaking process -- this $12 billion calculation falls well short of proving that Vivendi Universal won't get the $14 billion it seeks. And there is some unquantified value to Vivendi Universal of having Bob Wright manage one's assets. But at first glance, the deal doesn't instantly appear to be a sure winner for Vivendi Universal.

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