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Vault Holds Vivendi's Reel Value

'Film is a product that never dies,' one analyst says. Accurately assessing the worth of the movie and TV library is key in negotiating the sale.

August 26, 2003|Meg James | Times Staff Writer

The trail to uncover the wealth of Vivendi Universal winds through a vault in Universal City, past reels of "Frankenstein" and "E.T." to "American Graffiti" and "Apollo 13."

With more than 4,000 titles, Universal has one of Hollywood's largest and most eclectic film libraries. It boasts Alfred Hitchcock's thrillers -- "Rear Window," "Psycho" and "The Birds" -- alongside Steven Spielberg's gems such as "Jaws," "Jurassic Park" and the Oscar-winning "Schindler's List."

The shelves also are filled with chapters of television history: "Leave It to Beaver," "Woody Woodpecker," "The Munsters" and "Magnum P.I."

Vivendi's directors are meeting today in Paris to vote on how to proceed with the sale of these assets, along with the rest of their U.S. entertainment empire, which they value at $14 billion. The board could decide whether to enter into exclusive negotiations with General Electric Co.'s NBC or opt for a cash-rich proposal by Vivendi Vice Chairman Edgar Bronfman Jr.

For buyers, figuring out the value of Vivendi's entertainment properties comes down to determining how much money the core assets -- including the film library -- will generate in the coming decades.

So while Vivendi directors are mulling over their bids, half a world away in Los Angeles, teams of investment bankers hired by NBC are busy combing through the Universal catalog.

NBC has proposed combining its broadcast and cable networks, including CNBC, MSNBC, Bravo and the Spanish-language Telemundo, with Vivendi's entertainment operations to form a new company. The merger would create an international media colossus, valued at more than $45 billion, and would rival Viacom Inc. and News Corp., which both have a portfolio of properties including broadcast and cable networks and movie studios.

The move is a stark departure for GE, which under former longtime Chairman Jack Welch had been leery of the boom-or-bust film business.

The proposed venture with Vivendi illustrates that Welch's successor, Jeffrey Immelt, and NBC Chairman Bob Wright have slowly warmed to the idea of making movies. The change, top executives say, stems in large part from the belief that the Universal film library is a deep well that could be tapped to even out the studio's profit peaks and valleys.

"A film library is a one-of-a-kind asset," said Lloyd Greif, president of Los Angeles investment banking firm Greif & Co. "Most assets depreciate over time, but not film assets. Film is a product that never dies."

Studios in recent years have mined billions of dollars by releasing movies on digital videodiscs. These DVD releases oftentimes are little more than repackaged versions of laserdisc or videocassette releases, gussied up with special features. Home video divisions have become studio workhorses.

"Profit margins for home video activities -- DVD and VHS sales and rentals -- are far superior to the margins for the theatrical release," said David W. Miller, a Los Angeles-based media analyst for investment banking firm Sanders, Morris, Harris.

"It's almost to the point," Miller added, "where theatrical releases have become a promotional mechanism for a film's video release."

NBC could leverage the library by using it as a foundation to build new cable channels or video-on-demand subscription services, analysts say. Within a few years, Universal films and TV shows could be packaged and offered to viewers to download for a small fee, allowing the company to wring more money from films and shows that have been paid for many times over.

"You can continue to refresh the revenue potential," said David Goldhill, president and chief operating officer of Universal Television Group. "And there are a lot of opportunities for cross-promotion."

For example, Goldhill said, when Universal released "The Hulk" this summer, it simultaneously offered a DVD collection of the 1970s TV show "The Incredible Hulk." And Universal's feature film "Out of Sight" was retooled into a TV drama that will premiere on the ABC network this fall as "Karen Sisco."

Although known for its feature films, Universal is no slouch in the TV business. It operates three cable channels: Sci Fi, USA Network and Trio. Already in the vault, meanwhile, are more than 34,000 hours of television -- including plenty of hits that aired on none other than NBC.

The relationship goes back more than 40 years to one of NBC's first big shows, "The Virginian," which was produced by Universal.

This fall, the studio will provide five programs for NBC's prime-time lineup, including the three popular "Law & Order" shows produced by Dick Wolf. By some estimates, the "Law & Order" franchise is worth more than $1.5 billion -- and NBC would face costly renegotiations next year if the proposed merger with Vivendi were to fall apart.

Internationally, Universal is also a force. Revenue from foreign distribution of films and TV programs exceeds $250 million a year, with nearly half that amount coming from television shows.

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