NBC in Tentative Deal for Universal

In a move that could further consolidate a media landscape already dominated by a handful of titans, Vivendi Universal and General Electric Co.’s NBC entered into negotiations Tuesday to create a multibillion-dollar entertainment powerhouse.

Vivendi’s board of directors met in Paris on Tuesday and agreed to sign a nonbinding letter of intent to merge NBC’s broadcast network and cable channels with Universal’s venerable movie studio, theme parks and TV group. The new venture, tentatively dubbed NBC Universal, would overnight become the world’s eighth-largest media company based on revenue and boast strategic advantages similar to those enjoyed by Viacom Inc. and Walt Disney Co. -- the owners of CBS and ABC, respectively.

In choosing NBC, Vivendi dismissed a bid from one of its own board members and biggest shareholders. Vivendi Vice Chairman Edgar Bronfman Jr. had submitted a cash-rich offer to buy back the entertainment assets once owned by his family, and his bid was still under serious consideration as late as the weekend, according to several sources close to the negotiations. But the Bronfman proposal was ultimately rejected because it was deemed to be worth $1 billion less than the one from NBC, the sources said.

Under the deal, Vivendi would receive a 20% stake in the joint operation, which would be managed by NBC. Vivendi envisions selling its share of the business and exiting Hollywood by 2008 -- a much slower timetable than it initially wanted.

Vivendi chief Jean-Rene Fourtou said in a statement that the deal “would mark the beginning of a new era ... transforming us into a company with stronger assets and a healthier financial base.”

“For NBC this makes a lot of sense,” NBC Chairman Bob Wright said in an interview. “This works for both of us. If we do well, then we’ll both make a lot of money.”

To some, that’s a big if.

Although Wall Street reacted positively to the deal, some analysts noted that success would hinge on management’s ability to find synergies between the Universal and NBC operations -- and there are significant hurdles in the way. Among them are concerns that many of the businesses owned by NBC and Universal have reached a peak and may be hard-pressed to grow in the future. Others wonder whether corporate cultures will clash.

“It’s going to be very interesting to see how NBC and GE, which has long been conservative financially, reacts to the monumental risks involved in the movie business,” said Larry Gerbrandt, senior analyst at Kagan World Media. “With each major movie, you’re rolling the dice and risking $100 million.”

Investors in both companies, though eager for more details, responded warmly to the proposal. Vivendi shares had their best day in months, rising $1.35 to $18.25. GE shares closed at $30.44, up 87 cents. Both trade on the New York Stock Exchange.

“It looks on the surface to be a very attractive deal,” said Mario Gabelli, a Vivendi investor.

Still, the proposed combination sparked considerable anxiety Tuesday at Universal Studios headquarters in Universal City, where about 7,000 are employed. Many there were rooting for Bronfman, at least in part because they feared GE might embark on a major cost cutting campaign. Some analysts think that GE could slash hundreds of millions of dollars in expenses from a combined NBC-Universal studio operation.

NBC’s Wright, who would be in charge of the new venture, is set to meet with Universal executives today to try to allay those concerns.

Ron Meyer, the chief of Universal Studios, noted that “there’s always trepidation” during a transition period. He added that Tuesday’s announcement at least helps remove some of the uncertainty that has hung over his workforce while Vivendi was courted by various suitors. “I think people are pleased they now have something they can focus on,” he said.

The tentative agreement with NBC marks the final lap of a marathon auction that Vivendi hoped would offer a face-saving exit strategy from its disastrous foray into Hollywood almost three years ago, when it merged a French water utility with Universal Studios.

Puzzled investors never took to the scheme, and Vivendi’s shares at one point had plummeted 80% in value. Burdened by heavy debt, Vivendi sought an asset sale to raise much-needed cash.

As part of the proposed NBC Universal venture, GE would assume $1.6 billion of Vivendi’s debt and help Vivendi secure $3.8 billion in upfront cash backed by GE stock. GE is effectively valuing the Universal entertainment assets at $14.4 billion, exceeding Vivendi’s $14-billion asking price and giving a $9-billion valuation to Vivendi’s prospective 20% stake in NBC Universal.

Talks between the companies could still break down in the next 30 days -- the time frame for hammering out a final deal -- over vexing tax and legal issues that surround the complex ownership structure of the Universal operation. Moreover, NBC and its parent have a history of backing away from deals over issues of money and control.

Both sides, however, are highly motivated to close a deal, analysts and company insiders say. In recent weeks, NBC had as many as 100 people combing through color-coded binders stuffed with Vivendi documents in a designated “data room” at the New York offices of Citigroup Inc., an investment bank retained to conduct the auction.

A merger between NBC and Universal would represent the latest in a wave of media consolidation over the last decade, a trend currently sparking a fierce debate in Washington. The craze was kicked off in the mid-1990s by the easing of federal rules, which had effectively barred broadcasters from owning studios that produced their programming.

“We’re moving closer and closer to having a very small number of media monoliths,” said Marty Kaplan, associate dean of USC’s Annenberg School for Communication.

NBC would be the last of the major broadcast networks to partner with a leading Hollywood studio. If successful, the merger could put more pressure on Hollywood’s remaining unaffiliated studios -- Metro-Goldwyn-Mayer Inc., Sony Corp.-owned Columbia Pictures and DreamWorks SKG -- to merge or sell out.

Despite the hoopla surrounding the proposed NBC Universal deal, it pales when compared with the value of previous big media transactions. America Online, for example, bought Time Warner Inc. in 2001 for an estimated $100 billion. For industrial giant GE, maker of everything from light bulbs to jet engines to medical-imaging equipment, the deal also is relatively small: Revenue from the Universal assets amounts to about 5% of GE’s overall sales.

Still, the merger has potentially enormous strategic value to GE, presenting a rare opportunity for its key growth engine -- NBC -- to bulk up in an increasingly competitive industry.

“It would make NBC broader and deeper in content and stronger in a digital world,” Wright said.

By having its own major studio to provide programming, NBC also could avoid some of the costly negotiations it has faced in the past. The network has been forced to fork over to Warner Bros. $8 million an episode to renew its hospital drama “ER” and $10 million an episode to keep “Friends” on the air this season.

“Their mantra should be ‘Friends’ never again,” said Gerbrandt, the media analyst. “Those shows were a huge wake-up call to the network. They had a financial gun placed to their head.”

NBC had been looking at agreeing next year to pay as much as $8 million an episode to none other than Universal to keep its lucrative “Law & Order” franchise going.

On the cable front, NBC also would reap advantages from the merger. It would bolster its portfolio by adding Universal’s Sci Fi, USA and Trio channels to a stable that includes CNBC, MSNBC and Bravo. The deal also would give NBC more clout with powerful cable operators.

For its part, Vivendi hopes a merger between Universal and NBC can help lift its flagging stock price and provide much needed stability to a studio that has been through four owners in 12 years -- MCA, Matsushita, Seagram Co. and Vivendi.

The origins of the auction date back to summer 2002, when Vivendi’s board fired its former CEO, the flamboyant Jean-Marie Messier, who had been the architect of the company’s ill-fated Hollywood acquisition spree. Messier was replaced by Fourtou, a former pharmaceutical executive widely seen as a pillar of French commerce.

As Fourtou fashioned his plans for refocusing the company around its French telecommunications business, the entertainment assets were thrust into play.

The catalyst was oil magnate Marvin Davis, the former owner of 20th Century Fox, whose investment group late last year submitted a $13-billion offer to buy a controlling interest in all of Universal, including its music unit. Although that offer was rebuffed by Vivendi, it helped generate interest in the properties. And Fourtou, seizing on the opportunity, actively recruited others to participate in a bidding war.

By the spring, nearly six bidders were angling for all or part of the Universal empire. They included heavyweights such as John Malone’s Liberty Media Corp., MGM and Viacom.

But the process seemed to sour. One by one, bidders dropped out, balking at Vivendi’s $14-billion asking price. Bidders and bankers complained bitterly about Vivendi’s shifting requirements and its reluctance to share information.

Meanwhile, NBC lay low.

“We just hung in there,” Wright said. “We had our canteens full and when the temperatures heated up, we were there with plenty of water.”

Wright began talking to Vivendi executives about a possible merger as early as last fall, but the network pulled back after Fourtou made it clear that Vivendi wanted a big slug of cash to pay off its huge debts. NBC wasn’t about to write a multibillion-dollar check to win Universal.

Although widely dismissed as the auction heated up, NBC quietly pressed forward with its strategy to offer little cash upfront and instead trade on the allure of GE’s stability and reputation for strong management.

In the end, NBC persuaded Vivendi that it could realize the most value by merging the two operations -- and cashing out later. Indeed, NBC and Universal say that the combination would eventually be worth far more than its current valuation of $45 billion, by their estimate.

For now at least, Vivendi will continue to hang on to its Universal Music division, the world’s biggest record label. Like the rest of the music industry, it is suffering from weak sales amid rampant piracy. Vivendi executives have indicated that they would like to sell Universal Music one day -- but only at the right price. In the meantime, insiders say, Universal Music is expected to try bolstering its bottom line with layoffs and potential price cuts for its CDs.

*

Times staff writer Jim Bates contributed to this report.