Should GE cancel NBC Universal?
With NBC's ratings suffering, Wall Street debates whether General Electric still needs a media unit.
NEW YORK (CNNMoney.com) - Being a media company isn't as glamorous as it used to be. Just ask the management teams of Time Warner, Disney and Viacom...or their investors.
Shares of these traditional media firms have struggled lately for a variety of well-documented reasons: the biggest being that more people seem to be spending time online instead of watching TV or going to movies.
With that in mind, some are beginning to question whether conglomerate General Electric (Research) should hang on to its NBC Universal unit. This division owns the NBC network as well as cable channels CNBC, USA, Bravo, the Sci-Fi Channel and the Universal movie studios.
NBC, which GE has owned since 1986, has historically been viewed as a means of diversification, a way for GE to protect itself during times when the company's more industrial-oriented operations have struggled.
And Barry Ritholtz, chief investment officer with Ritholtz Capital Partners, a hedge fund that focuses on media and technology stocks, adds that the biggest benefit of owning NBC is that it helps GE control its image and present itself in a favorable light. (His firm does not have a position in GE.)
"The value of NBC hasn't been its bottom line impact or the amount of cash throws off. It is having a mouthpiece that protects GE. It enables the company to maintain and control its own public relations," Ritholtz said.
The Peacock has little reason to strut
But how effective can NBC be at accomplishing this goal for GE lately given that ratings have lagged that of other major networks (especially with the key 18-49 year-old demographic) for the past season and a half?
The ratings woes of the network are troubling but other parts of GE's media empire have issues as well. There are some concerns about how profitable "King Kong" will be for Universal, for example.
The movie has so far grossed about $204.5 million in the U.S. While that's hardly a flop, "King Kong" has not been nearly as big of a blockbuster as many movie industry analysts were expecting. Plus, the movie cost a reported $207 million to make.
NBC Universal, which accounts for about 9 percent of GE's sales and 13 percent of its profits, has seen its performance suffer a bit lately. In the third quarter, sales for NBC Universal were down 4 percent from a year ago (excluding the impact from the 2004 Summer Olympics).
Profits at the unit grew 13 percent, a touch below the 15 percent earnings growth that GE as a whole delivered.
GE will report its fourth quarter results on January 20 but the company is not expecting promising results. The company said in October that it expects NBC Universal's fourth-quarter revenues to drop between 5 to 10 percent and that earnings would fall about 15 percent from a year earlier.
So it might make sense for GE to consider a spin-off of NBC, some say.
French media firm Vivendi, which owns 20 percent of NBC Universal, is free to begin selling portions of its ownership stake in the unit this year, according to terms of the 2004 merger agreement that created the NBC Universal entity.
In addition, the success of GE spin-off Genworth Financial (Research) has furthered speculation about whether an initial public offering of NBC Universal could be a good move. Shares of Genworth, a life and mortgage insurance firm, have soared more than 75 percent since the company went public in 2004. GE still owns a minority stake.
"GE lived with those insurance operations for a long time and picked the right moment to start to walk away so who knows what can happen with NBC Universal," said Mary Anne Sudol, an analyst with Caris & Co.
One fund manager that owns GE said he does not think GE necessarily needs to spin-off NBC Universal but that the company would have his blessing if it decided to do so.
"NBC Universal has some appeal. It can generate quite a bit of cash," said Robert Zagunis, co-manager of the Jensen Portfolio fund.
"But I think, more than anything, it ties into how GE wants to allocate assets. If GE thinks they can redeploy assets better elsewhere, they will do that. Management has a history of making good decisions so I would give them the benefit of the doubt," he added.
But the time may not be right for a spin-off
Still, another analyst said that it does not make sense for GE to spin-off NBC Universal now since the broadcast network is in a position of weakness. As such, GE would probably not be able to fetch a strong valuation for the unit.
"Spin-offs sometimes make sense but where's the value creation of spinning off a network at a ratings trough?" said Brian Langenberg, an analyst with Foresight Research Solutions.
Langenberg argues that GE (and its investors) needs to be patient. After all, the media business is incredibly cyclical. It wasn't that long ago that CBS (Research), recently split off from Viacom (Research), was struggling. But CBS, thanks to hits like its "CSI" franchise and "Survivor" is now the ratings king.
Then there's the tale of ABC, owned by Disney (Research). ABC was a complete mess heading into the 2004-2005 season but it turned its fortunes around in one year thanks to buzzed about shows such as "Desperate Housewives," "Grey's Anatomy" and "Lost."
So there's hope for NBC. It has the Winter Olympics next month, which should boost ratings. The network will also begin airing National Football League games on Sunday nights beginning this fall, marking the return of the NFL to NBC for the first time since the 1997 season.
NBC is also tapping into the growing trend of offering TV shows for sale online, opening up a lucrative new stream of revenue for the company. Current NBC Universal shows such as "The Office" and USA's "Monk" in addition to old episodes of "Saturday Night Live" and "Dragnet" are available at Apple's (Research) popular iTunes online store.
Still, GE said in October that NBC Universal's profits should be merely flat when compared to 2005.
"You could kindly describe what's going on now at NBC as a pause in the growth. Earnings probably won't go anywhere over the next year or two," said Caris' Sudol.
But unless NBC starts to significantly hamper GE's overall results, Ritholtz thinks the company will resist any market pressures to spin it off.
"If it becomes a drag on earnings then it's a different story. But we're not there yet."
For more about the shuffling of assets in the media business, click here.
For a look at the prospects for the standalone CBS and Viacom, click here.
For more about NBC's ratings woes, click here.
Caris & Co.'s Sudol owns shares of GE but her firm has no banking ties to the company. A member of Foresight Research's Langenberg's family owns shares of GE but his firm has no banking ties to the company.