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Cable Operators

Could Liberty Latch Onto NBCU?

10/03/2009 2:00 AM Eastern

A possible sale of NBC Universal assets heated up last week when Comcast entered the fray — negotiating a deal to acquire a 51% interest in a joint venture with its own cable networks, according to several sources — and left the door open to new bidders, including Liberty Media’s John Malone.

Comcast initially denied reports last week that it had finalized a deal to purchase NBCU outright for $35 billion, but was eerily silent when reports surfaced that it was negotiating a transaction that would give it a 51% interest in a combined entity — consisting of its cable networks (E!, Style, Versus, G4, Golf Channel and others) and NBCU properties. NBCU declined comment.

Executives familiar with the transaction confirmed earlier reports that in addition to its networks, Comcast would contribute $4 billion to $6 billion in cash. NBCU parent General Electric would likely use that cash to buy out French utility Vivendi’s 20% interest in the programming giant. It would also offload about $10 billion to $12 billion in new debt to the new entity.

Those executives stressed that negotiations are in early stages and could fall apart. They also added that a Comcast deal is predicated on Vivendi selling its stake in NBCU to GE. Vivendi gets the right to put back that interest beginning Nov. 15.

Speculation that NBCU was in play has been swirling for weeks, as Vivendi — which gets the right to sell or put back its NBCU interest every fall — began making it known that it would consider selling the stake. Vivendi has said repeatedly that it does not believe the NBCU stake — left over from its sale of Vivendi Universal Entertainment to GE in 2003 — to be a core asset.

According to sources familiar with the companies, a handful of private equity players have expressed some interest in NBCU as well as Comcast. One conspicuous absence: Time Warner Inc.

At a conference in Washington, D.C., last Friday — "The First Draft of History," sponsored by the Aspen Institute and the Newseum — Time Warner chairman and CEO Jeff Bewkes said the media giant was not interested in NBCU.

According to the Newseum Web site, Bewkes avoided criticizing a Comcast/NBCU deal — “I don’t want to discourage Brian [Roberts],” he said — but didn’t appear to be a big fan of mega-deals.

“We’ve wasted some of the money in deals on the corporate level. … We have this new idea where we don’t do that anymore,” he said, according to Newseum.

Time Warner completed the separation of its content and cable assets earlier his year, spinning off its Time Warner Cable unit in March.

Collins Stewart media analyst Tom Eagan said it is logical for Time Warner to sit on the sidelines for NBCU, mainly because a deal would pose more complications than benefits for the media giant.

“I think the addition of the network and the stations adds a complexity they find less appealing,” Eagan said.

A better fit would be Liberty Media, headed by cable legend John Malone. Liberty is in the process of spinning out its Liberty Entertainment tracking stock to include its majority interest in DirecTV. As part of that transaction Liberty would increase its borrowings, creating a pile of cash it could use to make transactions.
“The other potential player here is Liberty/DirecTV,” Eagan said. “When they lever up, that will bring them $7 billion in extra capacity [after the Liberty Entertainment spin]. We had been thinking that they would use that to buyback shares or offer a dividend, but can Malone convince them to use that to create some kind of deal? Possibly.”


Liberty, which declined comment, has a small stable of programming assets — including interests in Discovery Communications, Starz Entertainment, QVC and GSN (formerly Game Show Network) — and seems like it would mesh well with NBCU. And Liberty has had experience running cable networks in the past. Over the years it has helped found and run major cable nets like BET, Discovery Channel and countless others.

But for the time being, the focus is on Comcast and how the deal would mesh with its properties.

Several analysts have called the deal a bad move for the cable giant, perhaps harking back to its failed $66 billion hostile bid for The Walt Disney Co., which was rejected by shareholders in 2004. In a research note, Sanford Bernstein cable and satellite analyst Craig Moffett wrote that while the joint venture is less onerous than an outright buy of NBCU — which would have cost upwards of $35 billion — it has its problems too.

On the plus side, Comcast gets access to networks representing 20% of the total TV viewership in the country, including the perennial cable ratings champ USA Network. Other properties in the stable include CNBC, MSNBC, Bravo, Syfy, The Weather Channel and Oxygen. And it also would gain a foothold on both sides of the online-content debate — it already has joined Time Warner in its TV Everywhere authentication initiative and, through NBC, would become a major player in online content provider Hulu.

For GE, which has struggled with big declines at its GE Capital Finance unit — segment profit at the unit was down 69% in the first half of the year to $1.7 billion from $5.6 billion — the deal looks a little better. While on the surface, it seems like GE is basically giving away control of its NBCU assets —the $6 billion in cash from Comcast will likely be used to buy out Vivendi — the deal does allow them a relatively seamless path to exit the media business.

NBCU reported an 8% decline in revenue in the second quarter, to $3.6 billion, while segment profit plunged 41% to $539 million, mainly because of write-downs and advertising-sales declines at its NBC broadcast unit and TV stations.

If Comcast combined its programming assets with NBC Universal, here’s a snapshot of what the entity could generate financially:
(in millions)

  2010E 2011E 2012E 2013E
SOURCE: Sanford Bernstein estimates
Cash flow $3,521 $4,025 $4,329 $4,463
Earnings $1,516 $1,766 $1,924 $1,965