Cutting a deal By David Care

The final twist in the saga of G.E.'s effort to wriggle free of network television may be upon us. According to a convoluted, network-gutting Scheme laid out in the March 15 New Yorker

The buyer of that unit, which puts out 22 weekly hours of primetime programming, also would become part-owner of NBC’s six television stations and of CNBC, the network’s business news cable channel. G.E. would keep the profitable news, sports and daytime programming operations–for a short while. The magazine suggests these units are expendable, meaning G.E. would soon dump them at a fire-sale price.
Financial analysts, who put the value of such a package at $1.5-2 billion if a 50-50 split in ownership of CNBC and the stations is assumed, are skeptical. Says dealmaker Jeffrey Leeds of Leeds & Co., “The deal doesn’t make sense from anyone’s perspective. It seems nuts.” For one, there’s G.E.’s apparent willingness to absorb a hefty capital loss on NBC, which G.E. bought in 1986 and now views as an albatross.
During fruitless negotiations last year with a parade of suitors that included Batty Diller, Ted Turner, Paramount Communications’ Martin Davis, and even Bill Cosby, G.E. adamantly stuck by its asking price of $4 billion for the whole network, the stations and CNBC, a sum closely reflecting their book value. Since then, however, NBC has plunged to a weak third in primetime ratings. It has lost ground in the daytime, lost David Letterman at night and it will lose Cheers and L.A. Law at season’s end.
Today, Wall Street assigns a $3 billion-and-falling worth to all of NBC’s assets, which means G.E.’s new escape plan entails a probable write-off of $1 billion or more. And while the idea of excising weak product lines may make sense in the auto industry, it doesn’t fly in the television business. “It’s like G.E. is trying to spin off a mini-network, but that would dilute whatever value the whole network has,” says media industry analyst Lisbeth Barron of S.G. Warburg.
To Wall Street’s thinking, the scheme also imperils vital links between NBC and its 200-odd affiliated stations. Even if G.E. or the entertainment unit’s buyer were to emerge as sole liaison with the affiliates, the network’s cleaving would produce two program line-ups. Legally, each station could take both, or drop one and fill the void with syndicated fare. “A major strength of a network is that affiliates receive an integrated programming package,” says Sanford C. Bernstein analyst Tom Wolzien, a former senior vp of cable and business development at NBC. “When you break up the contracts, you eliminate the network.”
G.E. also would be putting at risk its remaining $650-750-million investment in the six stations it now owns because sway over primetime offerings would pass to the entertainment unit’s incoming owner. “the value of those stations would be at the mercy of whoever controls primetime,” says a top investment banker who specializes in media deals. Wall Street’s unkind judgment doesn’t end there. In the primetime division, a buyer would absorb the most sparsely staffed segment of NBC, meaning the cost efficiences media companies seek through mergers would be lost.
So flawed is the plan that Wall Street types see its disclosure in the magazine as a leaky trial balloon. Leeds and other pros believe G.E. would be smart to set a sane asking price and revive bidding for the whole of NBC. The sooner a buyer is found the better, in view of NBC’s rash of traumas and its ongoing decline in earnings and value.
Who would match up best with NBC? Most of last year’s cast of aspiring Samoffs had no media organizations that could match up. A cable program empire like Turner’s would be ideal, offering multiple ways to slash costs and cross-promote. But TBS is controlled by cable systems Time Warner and TCI, and the government bars network-cable systems mergers. With barriers to broadcasters and syndicators operating under the same roof expected to fall soon, Viacom is a better candidate. A Hollywood studio and program syndicator like Paramount makes sense, too.
An imaginatively crafted bundle of securities could muffle the blow of such a merger to G.E.’s balance sheet. “If I were G.E .’s advisor,” muses Leeds, “I’d say, ‘Get creative!’ You could put NBC into a joint venture with Viacom. Viacom would get the common stock and G.E. would get back cash, along with a preferred stock that rises if earnings in the joint venture reach a certain level. G.E. would have an option to put (sell) the preferred to Viacom, and Viacom would have an option to call the preferred at a certain time. I’m surprised G.E. hasn’t done something like this.” If you’d like to hear more, Jack Welch or Bob Wright, you can reach Leeds at his Manhattan office.
Copyright Adweek L.P. (1993)