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Can NBC Universal Measure Up?

By Steve Rosenbush GE CEO Jeffrey Immelt hardly seemed like a future media mogul when he was chosen to succeed his mentor Jack Welch in 2001. Up to that point, Immelt had risen through the ranks of GE (GE), mastering Welch's Six Sigma method of quality control and rising to the top of the conglomerate's $12 billion Medical Systems unit.

Yet Immelt, now 48, has doubled GE's bet in the volatile media business -- and he may not be done yet. GE announced in late 2003 that it would beef up its NBC division by acquiring Vivendi's (V) Universal Entertainment division in a $14 billion deal. GE expects NBC Universal revenues to hit $14.8 billion in 2005 and operating earnings to rise more than 30%, to $3.3 billion.

EYING TIME WARNER? GE said in a report to investors last year that it viewed media as a major catalyst for industrial growth and that it wanted to build a "major scale" media business.

The benchmark for bigness is set by such diversified giants as $42 billion Time Warner (TWX), News Corp.'s (NWS) $22 billion-a-year business, and Viacom (VIA), which had revenues in excess of $26 billion in 2004. But the combined NBC Universal doesn't have the same scale or scope, and for it to be the "world's best content company" -- as Immelt vowed in 2004 -- it will need to make a sizable acquisition. And that's going to be difficult.

One possible partner is Time Warner. NBC Universal would benefit from Time Warner's immense library of programming. And Time Warner, which lacks a national distribution system as powerful as those of Viacom, CBS, and News Corp.'s Fox and DirecTV (DTV), would benefit from NBC's national network of TV stations. Time Warner's cable operations have only 10.9 million subscribers nationwide.

GE, with a market cap of $375 billion and a price-earnings multiple of 23, is significantly larger than Time Warner, which has a market cap of $86 billion and a p-e of about 28. While GE could pull off the deal, it could be somewhat dilutive because of Time Warner's higher p-e.

SCAVENGER HUNT. One investment adviser says Immelt and Time Warner CEO Dick Parsons discussed the idea early last year, but no merger talks at the corporate level followed. Of course, both companies were occupied by other matters. NBC was busy integrating Universal, and Time Warner was still recovering from its disastrous merger with AOL. "We're always looking for new revenue opportunities and the chance to expand," says NBC Universal spokesman Mike Doyle. "But right now we're focused mostly on organic growth." Time Warner declined comment for this story.

Satellite outfit EchoStar (DISH), with some 10.4 million subscribers and a national footprint, would also be a good strategic fit for NBC Universal. However, that combination would be very expensive because of EchoStar's prohibitively high p-e -- more than 100.

A big transformative merger, then, with all the accompanying stock market risk, seems unlikely. That means NBC Universal will have to focus on picking up pieces of other companies where it can. A good model for such deals would be Viacom's 2003 acquisition of the 50% of the Comedy Central cable channel it didn't already own.

RECALIBRATED SCALE. The challenge is finding companies that are willing to sell such properties. Time Warner was focused on reducing its debt in 2003 and had a reason to sell its stake in Comedy Central at the relatively cheap price of $1.2 billion. But it's no longer a buyer's market: The economy has revived, and Time Warner and other companies have largely cleaned up the problems caused by the 2000 market crash.

In the meantime, NBC Universal's rivals continue to grow. On Jan. 10, News Corp. announced that it will buy the remaining 18% of Fox for $5.9 billion. As rivals become larger and more powerful, the definition of a "major scale" media business keeps changing. NBC Universal is going to have to keep expanding if it wants to keep pace. Rosenbush is a senior writer for BusinessWeek Online in New York

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