) has signed a preliminary deal to merge its Universal Entertainment assets with General Electric (GE
). The combined company would have had 2003 revenues of $13 billion, with holdings that include film and TV studios, theme-park interests, cable channels like Sci-Fi, USA Network, and Bravo, and the hit NBC network.
And GE won't have to cough up any initial cash to get its 80% interest in the new entity. But after years of avoiding the production business, some wonder if GE is blinded by a bargain price. The equity deal is valued at $14 billion. GE Chairman and CEO Jeffrey Immelt spoke with BusinessWeek Associate Editor Diane Brady on Sept. 3 about what the deal could mean for his company. Edited excerpts of their conversation follow:
Q: Is this a bargain play for GE or a good strategic fit?
A: With Telemundo, Bravo, and some of the other moves we've made, it's clear we've wanted to make NBC bigger. We're looking for ways to make that business more valuable.
When [Vivendi] decided they were going to sell these assets, it didn't require us to get 60 people and do a study for two months. We know this world.... We were able to engage quickly.
Q: Would Jack Welch have done this deal 5 or 10 years ago?
A: I don't really care. Today is today, and that's all I think about.
Q: GE has maintained for years that it didn't want to be in the production business. What changed?
A: It's one of those industries that's going through strategic change in terms of the evolution of technology and what's happening with consolidation and distribution. Bob [Wright, chairman and CEO of NBC] and I both believe that content was going to be an important part of the future, so [production] began to be a natural part of the strategy.
The question wasn't whether to avoid production. Most of what I answered to -- or what Jack [Welch] answered to -- was whether NBC could survive without a studio. The answer to that was "yes" yesterday, and it's "yes" today.
Q: So you like the production capability?
A: Having the film library and stuff like that really gives us some strategic advantages. And the Universal team has done a pretty good job in how they run their studio, with less volatility and things like that. They operate it with an excellent management team.
Q: Does the library of film and TV episodes seal the deal in your mind?
A: It becomes even more important because there are so many different ways that people view programming today. We understand the nuances of the industry and where it's going. The whole transformation from analog to digital gives consumers more choices, and the idea of having more content to deliver to them is very attractive.
And the notion of being able to go from 90% advertising and 10% fees, as NBC has today, to roughly 50/50 gives us much more diversity.
Q: Is a comparison with AOL Time Warner (AOL
A: I don't really think about it that way. AOL Time Warner was done at a different time. It was more about combining an Internet service with a publishing service. This is about stuff we know how to do.
Q: This seems kind of opportunistic. It certainly wasn't in your top five in terms of industries you mentioned focusing on in your most recent annual report.
A: There is a core nucleus of GE businesses, of which NBC is one, that I'm always going to be looking to make bigger. I view this as being in the best interest of our investors.
Q: How does this help the overall company?
A: There are really five characteristics that I look at in a GE business. It's got to have some tie to technology, which this does. There's information and a way you can differentiate yourself with content, which is key. I like businesses that have multiple revenue streams, which this clearly gives us in terms of advertising and fees.
I like being able to have control over how we go to market, and this gives us more content to do that. It's capital-efficient. And I like businesses that can be globalized. This has less of a global aspect, but it's strong on the first four.
Q: Movie studios aren't really known for being capital-efficient.
A: You don't have to build a film factory every year. If you look at return on total capital of NBC even after this deal, it will be close to 20%.
Q: So the days of $20 million actors' salaries are over?
A: Who knows?
Q: You're getting into some more volatile areas when GE has traditionally tried to get smooth, predictable earnings. Are you willing to tolerate a little more boom and bust in this slower-growth environment?
A: The studios will be about 10% of the combined NBC's overall earnings. I'm here to grow our businesses over the long term.
Investors who own GE want to see consistent outperformance vs. the S&P 500 in terms of both earnings growth and returns. And that's what we're going to deliver for them.
Q: What about the theme-park interest? Are you going to actually get into that business or run screaming from it at the first opportunity?
A: The moment we complete this transaction, it's an asset that we own, so I want to maximize shareholder returns there, run it well, and see how it goes. But clearly it's not on our strategic plan, and it's something that we'll have to analyze very closely.
We don't bring any management expertise to it, but...like everything else, we'll run it with excellence.
Q: Just curious. Have you seen any movies recently?
A: Sure. I saw Seabiscuit. I've got a 16-year-old daughter, so I've seen all the American Pie movies. Look, I'm a consumer.
Q: Have you been to a Universal Studios theme park?
A: I have, in Orlando. I liked it.
Q: What happens if Universal suddenly pumps out 20 Ishtars or Giglis?
A: Ha! Who knows? My expectation is that we're going to do as well with this as we've done with NBC.
Q: So this really wasn't just too cheap to pass up?
A: I don't want us to be a company that does deals because we can. I want us to do the deals we need to do to improve strategically. If I didn't think this improved our business strategically for the long-term good of our shareholders, I wouldn't do it. We're not in the business of flipping assets. That's not our game.