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NBC in Tentative Deal for Universal

Vivendi gives the GE unit a chance to become a media powerhouse with the sort of strategic advantages enjoyed by Viacom and Disney.

September 03, 2003|Richard Verrier, Meg James and Sallie Hofmeister | Times Staff Writers

In a move that could further consolidate a media landscape already dominated by a handful of titans, Vivendi Universal and General Electric Co.'s NBC entered into negotiations Tuesday to create a multibillion-dollar entertainment powerhouse.

Vivendi's board of directors met in Paris on Tuesday and agreed to sign a nonbinding letter of intent to merge NBC's broadcast network and cable channels with Universal's venerable movie studio, theme parks and TV group. The new venture, tentatively dubbed NBC Universal, would overnight become the world's eighth-largest media company based on revenue and boast strategic advantages similar to those enjoyed by Viacom Inc. and Walt Disney Co. -- the owners of CBS and ABC, respectively.

In choosing NBC, Vivendi dismissed a bid from one of its own board members and biggest shareholders. Vivendi Vice Chairman Edgar Bronfman Jr. had submitted a cash-rich offer to buy back the entertainment assets once owned by his family, and his bid was still under serious consideration as late as the weekend, according to several sources close to the negotiations. But the Bronfman proposal was ultimately rejected because it was deemed to be worth $1 billion less than the one from NBC, the sources said.

Under the deal, Vivendi would receive a 20% stake in the joint operation, which would be managed by NBC. Vivendi envisions selling its share of the business and exiting Hollywood by 2008 -- a much slower timetable than it initially wanted.

Vivendi chief Jean-Rene Fourtou said in a statement that the deal "would mark the beginning of a new era ... transforming us into a company with stronger assets and a healthier financial base."

"For NBC this makes a lot of sense," NBC Chairman Bob Wright said in an interview. "This works for both of us. If we do well, then we'll both make a lot of money."

To some, that's a big if.

Although Wall Street reacted positively to the deal, some analysts noted that success would hinge on management's ability to find synergies between the Universal and NBC operations -- and there are significant hurdles in the way. Among them are concerns that many of the businesses owned by NBC and Universal have reached a peak and may be hard-pressed to grow in the future. Others wonder whether corporate cultures will clash.

"It's going to be very interesting to see how NBC and GE, which has long been conservative financially, reacts to the monumental risks involved in the movie business," said Larry Gerbrandt, senior analyst at Kagan World Media. "With each major movie, you're rolling the dice and risking $100 million."

Investors in both companies, though eager for more details, responded warmly to the proposal. Vivendi shares had their best day in months, rising $1.35 to $18.25. GE shares closed at $30.44, up 87 cents. Both trade on the New York Stock Exchange.

"It looks on the surface to be a very attractive deal," said Mario Gabelli, a Vivendi investor.

Still, the proposed combination sparked considerable anxiety Tuesday at Universal Studios headquarters in Universal City, where about 7,000 are employed. Many there were rooting for Bronfman, at least in part because they feared GE might embark on a major cost cutting campaign. Some analysts think that GE could slash hundreds of millions of dollars in expenses from a combined NBC-Universal studio operation.

NBC's Wright, who would be in charge of the new venture, is set to meet with Universal executives today to try to allay those concerns.

Ron Meyer, the chief of Universal Studios, noted that "there's always trepidation" during a transition period. He added that Tuesday's announcement at least helps remove some of the uncertainty that has hung over his workforce while Vivendi was courted by various suitors. "I think people are pleased they now have something they can focus on," he said.

The tentative agreement with NBC marks the final lap of a marathon auction that Vivendi hoped would offer a face-saving exit strategy from its disastrous foray into Hollywood almost three years ago, when it merged a French water utility with Universal Studios.

Puzzled investors never took to the scheme, and Vivendi's shares at one point had plummeted 80% in value. Burdened by heavy debt, Vivendi sought an asset sale to raise much-needed cash.

As part of the proposed NBC Universal venture, GE would assume $1.6 billion of Vivendi's debt and help Vivendi secure $3.8 billion in upfront cash backed by GE stock. GE is effectively valuing the Universal entertainment assets at $14.4 billion, exceeding Vivendi's $14-billion asking price and giving a $9-billion valuation to Vivendi's prospective 20% stake in NBC Universal.

Talks between the companies could still break down in the next 30 days -- the time frame for hammering out a final deal -- over vexing tax and legal issues that surround the complex ownership structure of the Universal operation. Moreover, NBC and its parent have a history of backing away from deals over issues of money and control.

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