GE's NBC Sale Brings Immelt Cash, Scrutiny


GE will get $8 billion net out of the joint venture and can focus more resources on aviation, medical imaging, finance, and power generation

(Bloomberg) — General Electric Co.'s (GE) plan to bow out of show business will leave Chief Executive Officer Jeffrey Immelt with $8 billion in net cash and an obligation to explain where he plans to steer the company, investors say.

"We need to hear, 'This is where we're going to focus going forward,'" said Peter Sorrentino, who helps manage $13.8 billion including 2.28 million GE shares and bonds at Huntington Asset Management in Cincinnati. "It's their game to lose."

GE is selling a 51 percent stake in NBC Universal, the TV, cable, film and theme-park operator, to Comcast Corp. in a deal that creates an entertainment company valued at about $37 billion, the companies said today in a statement. Fairfield, Connecticut-based GE will get a net of $8 billion in cash when the transaction is complete after merger costs and a buyout of partner Vivendi SA's 20 percent stake.

Selling NBC Universal lets Immelt, the ninth chairman in GE's 117-year history, shift resources to the company's main businesses and engines of future growth: power generation, aviation, rail and medical-imaging equipment, plus a finance arm — GE Capital — to serve them.

By unloading NBC Universal, Immelt, 53, is shifting away from one of GE's highest-margin businesses historically at a time when advertising revenue and profit from traditional media are under threat from new outlets such as the Internet.

11% Return

NBC Universal has provided an average return of 11 percent, Immelt said in today's statement. Last year, NBC Universal provided 9.3 percent of GE's revenue and 12 percent of operating profit, according to Bloomberg data. The relatively stronger profit contribution reflected the larger impact of the financial crisis on GE's finance unit and lower income from medical- imaging equipment.

Vivendi, NBC Universal's minority owner, agreed this week to sell its stake to GE for $5.8 billion, according to today's statement. That will let GE proceed with plans to put NBC Universal into a joint venture controlled by Philadelphia-based Comcast, the largest U.S. cable-TV provider. If the Comcast (CMCSA) transaction isn't completed in September 2010, GE will buy 7.66 percent of Vivendi's stake for $2 billion, according to the statement.

Under the terms announced today, GE can exit half of its remaining interest in the new venture 3 1/2 years into Comcast's ownership and the remaining stake in year 7.

Welch Hallmark

The 1986 purchase of NBC was one of GE's hallmark acquisitions under Jack Welch, who led the company for two decades. Immelt, his successor, tripled the size of the entertainment division by assets before seeking a buyer.

"I tried so hard to change the entire character of NBC over the years, to have a broad base of advertising and non- advertising revenue," said Robert Wright, 66, who ran NBC during most of the Welch years and handed the reins to Jeffrey Zucker in 2007. "When I left, 50 percent of revenue came from consumers and theaters."

Today, the original NBC broadcast network amounts to less than 10 percent of entertainment revenue, the company says. Wright calls the sale of NBC Universal "very good for Comcast and very good for GE as well."

Handing Comcast control will end talk of NBC as an oddball inside GE, criticism that was exacerbated by the network's fall from No. 1 in Nielsen Co. audience ratings in 2001-2002 to No. 4 and a drop in profit through nine months of this year.

'Good Day'

"This is definitely for Jeff a very good day," said Nicholas Heymann, an analyst at Sterne Agee & Leach Inc. who recommends selling GE shares. "This is something that has been a thorn in his side for a few years. He can certainly direct the organization to focus on its core industrial roots as they continue to shrink GE Capital."

Since taking over from Welch in 2001, Immelt has sold other units built during earlier GE regimes, including plastics and insurance, while expanding areas he's labeled infrastructure. Not all of his moves succeeded: Immelt entered and left subprime lending, taking a loss, and agreed last month to sell a security business he built from scratch.

"We believe the global infrastructure markets are very robust for us and offer lots of opportunities," Immelt said today on CNBC. "Those are priority No. 1."

About $23 billion to $25 billion in cash will be available for him to spend, Immelt said. The company remains committed to owning a finance business, he said.

"From a GE Capital standpoint, we've done a lot to strengthen the balance sheet," he told CNBC. "Our ratios are on par with any bank."

Acquisitions

Under Immelt, Wright and Zucker made more than $21 billion in acquisitions, including the combination with Paris-based Vivendi's $14 billion in media assets. That deal created the current NBC Universal, which is owned 80 percent by GE and 20 percent by its French partner. Other purchases included the Bravo cable network, Telemundo Spanish-language TV and Oxygen.

GE fell 10 cents to $16.07 yesterday in New York Stock Exchange composite trading. The shares are little changed this year after dropping 56 percent in 2008.

"We have long argued that NBCU does not fit in the GE portfolio and therefore we see this move as an important step in portfolio streamlining," Jeffrey Sprague, a Citigroup analyst, wrote in a note to clients Dec. 1.

Sprague has a "hold" rating on the stock and estimates GE's exit from NBC Universal will reduce earnings by 5 cents to 10 cents a share over several years.

"The bigger question will be whether capital can be redeployed in the future in a successful value-creative manner," Sprague wrote.

Capital Needs

NBC would have needed more capital to temper the decline of its once-reliable broadcast network, said Steven Winoker, an analyst at Sanford C. Bernstein & Co.

"It makes more sense to put that money in technology infrastructure, energy infrastructure," Winoker said in a Dec. 1 interview. He raised his rating on the stock to "outperform" from "market perform" last month, citing diminished risk at the finance unit and the performance at the industrial units.

Through nine months of 2009, NBC's sales and profit have declined 11 percent and 27 percent, respectively, and among peers the broadcast network has seen the largest loss of prime- time viewers in the 18-to-49 age group advertisers seek, down 8.2 percent in the current TV season, Nielsen data show.

GE's operating margin from NBC is projected at 16 percent this year, the lowest since 1997, according to data compiled by Bloomberg and research from Bernstein. In 2003, before the Vivendi combination was completed, GE reported a 29 percent operating margin on NBC revenue.

On the Books

GE valued NBC, then mainly a broadcast TV network, at $3.39 billion on its balance sheet following the purchase in 1986. By 2004, the year Immelt added Vivendi's (VIV.FP) media and theme-park properties, NBC Universal was valued at $34.2 billion.

That proved to be the peak valuation on GE books, according to GE regulatory filings.

"NBC Universal had moved to being marginal from an industry structure point of view," said Lawrence Haverty, a portfolio manager at Rye, New York-based Gamco Investors Inc., which owns 3.14 million GE shares, as well as stock in Vivendi and Comcast shares. "It wasn't No. 1 or No. 2 in the space and wasn't likely to get back there anytime soon."

Investors including Haverty and Sorrentino said they want GE to set aside at least some of the NBC Universal proceeds as a cushion for potential cash needs at GE Capital.

"I want to hear that they are setting aside some kind of reserve or contingency," said Huntington's Sorrentino, adding another rough period on the financial markets may require GE to provide more capital to the finance unit.

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net


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