VideoIn the film industry, General Electric Co.'s $14 billion deal for Vivendi Universal's entertainment assets has created all the buzz of an impending blockbuster. How will GE's famous finance discipline play, movie mavens want to know, in an industry not exactly known for the rigor of its accounting?
Although GE has run the NBC television network for years, film production involves "dealing with 20 bets of $75 million to $100 million each year," says David Londoner, a retired entertainment analyst who now serves on two media-company boards. And a big part of a moviemaker's challenge, of course, is to rein in the hyperpriced star system.
Given the vagaries of the film business, it is unclear when, or whether, GE might extend its success with NBC across the new NBC Universal division. The deal, if completed, would create a unit with $14 billion in annual revenues from movie and TV production, a large film library, and theme-park interests, along with network and cable operations. But a look at the way GE valued Universal, and the terms GE and Vivendi chose for the combination, suggest that GE's entry into this new business will require some draconian financial work.
The price paid for Universal is clearly a subject of pride at GE. "We're pretty excited about the valuation," CFO Keith Sherin told analysts in a postannouncement conference call, calculating the multiple at 14 times Universal's estimated 2003 EBITDA (earnings before interest, taxes, depreciation, and amortization). (GE declined to answer specific questions from CFO for this article.) How good a multiple is that? Hard to say, given that some comparables Sherin cited were acquisitions completed at the height of the bull market, starting with Vivendi's 2000 EBITDA multiple of 22.6 for Seagram (see "The Price of Admission", at the end of this article).
While the immediate financial impact on GE would be neutral, said Sherin, the deal would be accretive to earnings per share by 1 cent to 2 cents in the second year. GE predicted that it would realize $400 million to $500 million in synergies after the acquisition, and estimated that 75 percent of the synergies would come from cost savings, with the rest in revenues.
Why Overpay?
Just as the glamour of entertainment properties tends to increase valuations beyond the fundamental worth of the assets, so does GE's reputation as a financial powerhouse tend to have a halo effect. "They're incredibly hard-core, numbers-oriented people," says David Larcker, professor of accounting at the University of Pennsylvania's Wharton School. Finance at GE, he adds, "tries to drive out all the fluff and the hubris" when valuing targets. Beyond that, GE is known for holding finance executives responsible for M&A forecasts. The company will revisit the terms later to determine "what the targets were, and how close you were," he says. "If you innovate and you win, you're rewarded. If you don't, you're penalized."
Still, there's little excitement outside GE about the multiple it paid. "If you look at the pure economics of the movie business, taking into account library and current production, realistically these businesses ought to sell at 10 to 12 times cash flow," says Londoner. The multiple for Universal's theme parks—which compete against The Walt Disney Co.'s—should be even lower, perhaps 6 times EBITDA.
The price GE paid puzzles some observers. "Everybody is more optimistic about running a movie company than they deserve to be, and as a result they end up overpaying," says Londoner. But "the one thing you know about [NBC chairman and CEO] Bob Wright and the whole GE crowd is that they aren't mesmerized by Hollywood."
Why, then, might GE have offered a higher multiple than seemed necessary?
For one thing, there were other bidders, offering deals with more cash. Among GE's rivals were one consortium led by Seagram heir Edgar Bronfman Jr. and a second called Universal Partners, whose offer was designed by former Seagram CFO and onetime Universal Studios co-chairman Brian C. Mulligan. Both consortia reportedly proposed to pay more than $11 billion, nearly all in cash.
"Once Vivendi decided it was willing to take consideration other than cash," says Mulligan, "it was difficult for financial buyers like us to compete with a strategic buyer—especially one as formidable as GE.''
Another huge factor was that GE had decided it needed to integrate movies and TV. With Disney owning ABC, Viacom controlling Paramount and CBS, and Fox Entertainment (films and TV) belonging to Rupert Murdoch's News Corp., NBC is the only network not affiliated with a studio. A property like Universal might not be available again for 10 years, explains analyst Marvin Roffman of Philadelphia-based Roffman Miller Associates Inc. "That's the business [GE] wanted to get into, and to be able to do it in one fell swoop, they had to pay a high price," says Roffman.
Sherin told analysts that the EBITDA multiple shrinks to about 10 if savings from synergies are realized. Of course, many an acquisition has foundered on the quest for synergies that evaporate on close examination. In this case, some of the synergies are expected to stem from the range of familiar cable brands coming together under the NBC-Universal umbrella—USA Network and Sci Fi, in addition to Bravo, CNBC, PAX, The History Channel, and others—all benefiting from access to "content" from a growing Universal library that already contains more than 5,000 titles. The combination also takes GE's existing entertainment businesses toward a 50-50 mix of fee- and advertising-based revenue; before, nearly all of NBC's revenue was ad-based.
Reader Comments» Post a comment