General Electric is being forced into a fire sale of its NBC assets. Vivendi, GE partner in NBC, is exercising its option to sell. GE has the right to buy Vivendi's 20% share. But - GE is too broke to afford buying it. GE's managers are scrambling and doing a bang up job of making the best of a bad situation, but the fire sale of NBC is costing GE about $3 Billion of value.
Such is the retribution of the Gods who punish hubris mercilessly. GE's managers are hubris personified.......
The much reported GE-Vivendi-NBC-Comcast transaction appears to be developing some structure. Junior Investment Bankers and their Junior Lawyer counterparts are generating reams of paper right-this-very-moment. Owners can have a reasonable degree of confidence that the transaction structure discussed in the press approximates reality. Gudovac first wrote about the NBC transaction a few weeks ago.
This article explores the transaction from the perspective of GE's Owners. Owners should note that GE is being forced to off load its stake in NBC as a result of Vivendi exercising its call option. GE does not have enough resources to acquire Vivendi's stake. Gudovac believes the GE team has created a structure which limits the damage to GE from the forced sale of its 80% stake in NBC.
NBC generates approximately $3 billion in operating cash flow annually.
The likely transaction appears to be a JV between a Comcast and GE with each party providing a mix of assets to the new entity. Vivendi will realize cash from the sale of its 20% stake in NBC.
The table at the right is an attempt to quantify the transaction structure. GE appears to be getting between $11 and $8 Billion 'cash' at close. This represents a nice addition to GE's $50 Billion cash on hand. Gudovac has calculated that GE Capital will consume between $30 and $36 billion covering loan losses over the next 3 years. Cashing out of NBC will therefore cover about 1/4 of the loan losses.
In addition, GE will have a call on 49% of the JV's cash flows. The Net Present Value of the cash flows are between $9.8 and $17 billion. The Discount rate for these cash flows is taken from the table below. ( 15% and 8 5/8% high and low ) Default risk for any debt held by the JV appears to be on Comcast. Comcast owns 51% of the JV and will evidently 'backstop' all JV debt.
Therefore, net benefit to GE from the JV transaction is between $20 and $25 Billion. ('Cash' at close plus NPV of 49% of future cash flows)
It is interesting to compare the expected value of the JV versus expected value of GE buying the 20% Vivendi share. The Vivendi shares are worth between $4 and $7 billion. The table at the right suggests that the Net Present Value of NBC's future cash flows is between $16 and $28 Billion.
The Net Benefit to GE of the JV and buying out Vivendi are nearly identical. GE is arguably losing in the JV structure 11% versus a high value for NBC.
This is almost $3 billion dollars of real value being left on the table by GE. However, given the terrible bargaining position GE's managers are in, Owners can accept that GE's managers are making the best of a bad situation.
Owners may want to look closely at Comcast. If GE is leaving $3 billion of value on the table, then perhaps Comcast is the enterprise gaining $3 billion of value. Gudovac does not presume to understand media-entertainment companies and therefore leaves the stage for others to comment on the transaction from the Comcast point of view.
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