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Buying Universal puts GE in the movie business. Its plan for synergies might make a good screenplay.
Roy Harris, CFO Magazine
December 1, 2003
In 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.
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.
While few deal-making experts will criticize GE publicly, some scoff privately at its supposed efficiency in M&A pricing. In the entertainment business, GE has yet to live down its 2002 price of $2.7 billion for number-two Spanish-language broadcaster Telemundo—at a cash-flow multiple of 45. And later that year it added Bravo for $1.25 billion, a price analysts said represented 27 times EBITDA. (Neither deal was included in the list GE shared with analysts.) "A little secret on Wall Street is that you want to be a seller to GE," says one GE watcher, who asked for anonymity. "They pay full value."
Stock on the Barrelhead
Another reason GE paid up was that it didn't want to offer cash. Debt-laden Vivendi was drawn to cash offers, so GE, which chose to pay in stock, agreed to assume $1.6 billion of debt in the deal, and structured issuance of $3.8 billion in GE common shares so that Vivendi could liquidate them immediately. The terms will give Vivendi 20 percent of the new NBC Universal—valued by the parties at $8.3 billion—and allow Vivendi to begin cashing in that stake in 2006, with GE holding first rights to acquire Vivendi's NBC-Universal holding.
Some analysts are less skeptical than others about GE's synergy claims. Still, the synergy-based savings target set by GE "is an absolutely achievable objective," analyst Roffman believes. "The company is very secretive, but I know they have a grand plan."
Using GE's finance expertise to cut costs in the movie business may not be easy. The current Universal team, headed by Ron Meyer, already gets high marks for cost controls. Universal's recent financial problems resulted more from "structural issues" under Vivendi, says Wright. The studio has "bounced around among different owners for 10 or more years, [giving Universal] a tarnished look." Analyzed on their own, though, he says, Universal's operations "look pretty good to us." (Some suggest that GE, lacking its own production experience, might have to hire new management talent.)
As for more-draconian cost controls, other studio owners—starting with Disney in the 1980s—have tried in vain to fix a system that routinely includes paying stars up to $20 million per picture. So analysts wish GE good luck. "The creative talent," says Roffman, "always seems to win out."
Roy Harris is senior editor at CFO.
|The Price of Admission|
What some have paid to buy media companies.
(in $ billions)
GE / Universal
Liberty Media / QVC
GE (NBC) / Bravo
Vivendi / USA Networks
GE (NBC) / Telemundo
Disney / FOX Family
Vivendi / Seagram (Universal)
Viacom / CBS
Westinghouse / CBS
Disney / Capital Cities-ABC
Seagram / MCA (Universal)
Viacom / Paramount
Average Multiple = 18.6
Sources: General Electric, press reports
Chart prepared by Caitlin Austin