Last Updated: April 11, 2008: 11:29 AM EDT
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For GE and NBC, breaking up is hard to do

The broadcast network has never been a comfortable fit for General Electric. Some investors would like to see it sold.

By John Simons, writer

General Electric CEO Jeff Immelt has so far resisted calls to sell NBC Universal.

WASHINGTON, D.C. (Fortune) -- General Electric's latest attempt to revive its troubled NBC television unit with a 65-week "superseason" of fresh programming is grabbing a lot of headlines these days. But some investors wonder if it's worth the conglomerate's trouble.

The Peacock Network and General Electric (GE, Fortune 500) have long been seen as an odd couple. In recent years, investors have questioned how well NBC Universal - with its movie and television studios, theme parks, resorts, and Internet operations - fits with GE's nuts and bolts industrial and financial services businesses.

Those questions are likely to come up again after General Electric reported Friday a sharp drop in profits amid the slowing economy. Net income for the first quarter fell to 6% to $4.3 billion, or 43 cents a share. Both revenues and profits missed average analyst estimates. Although GE's financial services unit was the main culprit for the dismal earnings, NBC Universal could be the ultimate victim of a prolonged slump.

GE's businesses are under pressure to grow in the face of a looming recession. Although GE's revenues rose nearly 14% in 2007, growth is expected to slow to 8% this year.

But NBC Universal, part of the GE empire for two decades, is hardly seen as a growth engine - which is why some investors would like to see a sale or spinoff. Ratings have been dismal since hit shows "Friends" and "Frasier" ended in 2004; NBC has finished the television season last among the major broadcast networks in the last three years. Growth at NBC Universal has been mostly flat: The entertainment unit last year accounted for about 9% of General Electric's $172.7 billion in revenues and about 14% of its profits. The company said on Friday that it expects operating profits for NBC for the full year to be up less than 5%.

Still, an NBC Universal breakup is unlikely to happen anytime soon. The network is on track to have one of its better years, between the broadcast of the Summer Olympics in Beijing and an election-year advertising bonanza. Indeed, NBC Universal was one of the few bright spots in General Electric's latest earnings: The unit posted a profit of $712 million, a 3% increase from the year-ago quarter and its sixth consecutive quarter of rising income.

What's more, NBC's shift from a September-May television season to year-round programming could pay off. Then too there's the problem of finding a buyer: Given the severity of the credit crunch on Wall Street, financing could be hard to find.

But with more serious problems emerging in GE's core businesses, CEO Jeff Immelt may have a tough time convincing investors that NBCU is worth his time. "NBC Universal is definitely the biggest outlier in GE's portfolio of businesses," said Peter Jacobs, an analyst at Ragen Mackenzie, before GE's earnings report. "People have trouble seeing how it fits into the bigger conglomerate."

Still, says Jacobs, "NBCU does offer some diversification, which is good when GE's financial division is seeing pressure this year."

Deane Dray, a Goldman Sachs analyst, cites NBC Universal's "exceptional profitability (20% pre-tax margins)" in arguing that investors are wrong to focus on NBC's ratings. Indeed, primetime revenues represent less than 15 percent of NBC Universal's annual earnings. The division's cable networks and film unit are growing faster, and represent 75 percent of the company's revenues.

For that reason, JPMorgan analyst Stephen Tusa also believes that a spinoff or sale of NBCU and its parts would "unlock significant value" for GE investors.

Tusa calculated in February that NBCU could be worth about $44 billion, which is as much as $15 billion more than General Electric's stock price implies. Tusa theorizes that the best scenario for a sale or spinoff would have to include a separation of the lagging TV production business from NBCU's more lucrative enterprises.

"We think a systematic break-up of the business through several potential deals could be an interesting strategy to capture some of the upside," wrote Tusa. Tusa says GE could break up its media businesses by separating the broadcast TV unit from the rest of the operation, and then selling it to private equity investors. The remaining portion of NBCU - cable networks, movies, theme parks, and digital - could be spun off in a public stock offering.

In March, Immelt told investors that NBC Universal is not for sale, although he did acknowledge there's a mismatch between the network and the company's other businesses, according to Goldman's Dray. "This should quell recent speculation that an NBC sale was imminent but the question of NBC's fit with GE will likely remain a point for debate."

Indeed it will. "If an investing group or another company offered Immelt a nice premium for NBCU, I'm sure GE would consider selling it," says Jacobs, the Ragen Mackenzie analyst. But in the current financial environment, that is unlikely to happen.  To top of page

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