The wires are abuzz with rumours concerning GE and its NBC unit. Various transaction structures have been suggested by those in the dark. Journalists have written the usual filler about synergies and strategic fit.
However, not one story has posed the core question: Why doesn't GE buy Vivendi's 20% stake in NBC for it self ?
Vivendi has a put option to demand GE purchase its 20% stake in NBC. Vivendi can exercise this option every November. Acquiring the remaining 20% of NBC would cost GE between $4 and $7 billion made up of a mix of cash and paper. This is not a large sum for GE which is sitting on $50 billion of cash.
NBC should be a good fit for GE . The business requires little working capital and minor investments to continue generating healthy cash flows. Analysts estimate that NBC generates roughly $3 billion annual cash flow for GE. TTM operating Cash flow for all of GE is $36 billion.
NBC, therefore, generates about 8% of GE's cash flow. Despite all the travails of all Big Media and NBC in particular, NBC remains a steady source of cash for GE.
NBC may be a nice little cash flow machine for GE, but GE is not able to take advantage of Vivendi's demand to sell....because GE is broke.
GE's overarching concern these days is generating enough cash to cover losses from GE Capital.
Gudovac has written about GE's inadequate reserves back in July. Gudovac estimated that GE Capital will require $30 - $36 billion of cash over 36 months to cover loan losses. This is significantly more than the $2 - $9 billion estimated by Management in July.
There is also risk that GE Capital might violate its debt covenants without a capital infusion.
Divesting NBC should provide between $20 and $30 Billion value for GE's 80% stake. If the divestiture is a mostly cash transaction, GE could cover its loan losses in a coup de main. If, on the other hand, the transaction involves little cash and much paper - owners should seriously question Management's judgement.
Owners should monitor developments carefully and be prepared to react quickly.
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Don't Get Massacred !
Gudovac1941@gmail.com
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