Is the Media Business Giving GE Indigestion?

Many commentators have wondered aloud what GE is thinking with its NBC Universal division (NBCU). The news operation is lurching far left and has to deal with the sudden loss of Tim Russert. The division has a big bet riding on this summer's Olympics.  All this plus a healthy dose of risk, should make GE a little queasy.

Thanks to the financial structure of a $3.5 billion acquisition of the Weather Channel, new questions are raised about GE's commitment to the network and assorted other properties under the NBCU flag. A short piece in Wall Street Journal spoke directly to the puzzle:

"General Electric calls NBC Universal a core business. The television network's latest deal, the nearly $3.5 billion purchase of The Weather Channel, casts doubt on that. After all, the $271 billion conglomerate could have easily written a check to swallow the foul-weather forecaster whole. Instead, NBC teamed up with private-equity concerns Bain Capital and Blackstone Group to split its ownership three ways."

Acquiring the Weather Channel in partnership with private equity partners like Bain and Blackstone is not a strong indicator NBCU is a "core business" for GE. The strategic advantage of teaming up with these players eludes me, if we assume GE wants to stay in the business. GE certainly doesn't need them for their money, operating experience, or even to mitigate the acquisition risk. Oddly, Bain and Blackstone are contributing a large portion of the equity and a big hunk the debt financing. GE CEO Jeffrey Immelt's "core business" incantation appears rather hollow when the company is bringing in private-equity partners for such a small (for GE) yet strategic deal.

Liability and other risk

Immelt should be concerned with the intangible risks associated with the TV and movie business. From the unseemly feud with Fox News that percolated all the way to Immelt's office to the embarrassing episode with former CEO Jack Welch in an appearance on the company's business cable channel CNBC commenting on GE's first quarter earnings debacle.  Undoubtedly, NBCU president Jeff Zucker sends over a supply of sleeping pills with his reports to head office. A revealing account in this week's Vanity Fair of CNBC's role in the fall of Bear Stearns portrays CNBC as a bunch of loose cannons running around at their Englewood Cliffs New Jersey headquarters. 

As rumors about Bear's viability were widely circulating Bear CEO Allan Schwartz decided to appear on CNBC. Looking to quiet the rumor mill he wanted to pick the friendliest inquisitor. According to Vanity Fair, Schwartz feared the risk in picking the wrong CNBC correspondent for the interview.

All the network's talent -- Gasparino, Maria Bartiromo, Faber, Larry Kudlow-had requested the interview, and whoever didn't get it, Schwartz feared, might retaliate on the air. "Each of these correspondents has his own producer, and they all seem to hate each other," one Bear executive told me. "If you choose Faber, you know Bartiromo will bash you the next day." Schwartz directed Russell Sherman to identify the CNBC executive who supervised the correspondents, explain the situation, and ask that the correspondents who didn't get the interview refrain from attacks. Sherman, however, couldn't identify a single CNBC executive who seemed to have control over the correspondents. "Everyone on Wall Street knows the joke," says another Bear executive involved in the discussions. "At CNBC, there is simply no adult supervision."

This is not the first or last time CNBC finds itself at the vortex of a sticky situation. There isn't enough insurance available to cover the liability risk arising from GE's ownership of this cable channel.  An excellent example of the kind risks they face is a February interview where New York Insurance Superintendent Eric Dinallo told William Ackman, head of New York hedge fund Pershing Square Capital Management, to be careful with some of his criticisms of monoline bond insurers Ambac and MBIA. Firms that Ackman was aggressively shorting at the time and waging a public relations war to run down their price. Dinallo noted that New York State law prohibits false statements about the financial condition of state-regulated insurance companies. These are criminal statutes.

GE is close to an untenable position in managing NBCU. If they exercise due care and supervision, the producers and talent will scream interference. If a major incident occurs with their talent and content, the parent corporation will be held liable.

GE is under no pressure to sell. They can dispose of NBCU at a time and place of their choosing. Selling after a successful Olympic run could present an ideal time to get out from under a business that is obviously incompatible with GE's business goals and objectives. A company like News Corp with Rupert Murdoch at the helm is far better situated to control this kind of risk.

GE's inherent risk is product liability and finance-related. Risk arising from media and entertainment businesses is a different dimension for GE.  
Many commentators have wondered aloud what GE is thinking with its NBC Universal division (NBCU). The news operation is lurching far left and has to deal with the sudden loss of Tim Russert. The division has a big bet riding on this summer's Olympics.  All this plus a healthy dose of risk, should make GE a little queasy.

Thanks to the financial structure of a $3.5 billion acquisition of the Weather Channel, new questions are raised about GE's commitment to the network and assorted other properties under the NBCU flag. A short piece in Wall Street Journal spoke directly to the puzzle:

"General Electric calls NBC Universal a core business. The television network's latest deal, the nearly $3.5 billion purchase of The Weather Channel, casts doubt on that. After all, the $271 billion conglomerate could have easily written a check to swallow the foul-weather forecaster whole. Instead, NBC teamed up with private-equity concerns Bain Capital and Blackstone Group to split its ownership three ways."

Acquiring the Weather Channel in partnership with private equity partners like Bain and Blackstone is not a strong indicator NBCU is a "core business" for GE. The strategic advantage of teaming up with these players eludes me, if we assume GE wants to stay in the business. GE certainly doesn't need them for their money, operating experience, or even to mitigate the acquisition risk. Oddly, Bain and Blackstone are contributing a large portion of the equity and a big hunk the debt financing. GE CEO Jeffrey Immelt's "core business" incantation appears rather hollow when the company is bringing in private-equity partners for such a small (for GE) yet strategic deal.

Liability and other risk

Immelt should be concerned with the intangible risks associated with the TV and movie business. From the unseemly feud with Fox News that percolated all the way to Immelt's office to the embarrassing episode with former CEO Jack Welch in an appearance on the company's business cable channel CNBC commenting on GE's first quarter earnings debacle.  Undoubtedly, NBCU president Jeff Zucker sends over a supply of sleeping pills with his reports to head office. A revealing account in this week's Vanity Fair of CNBC's role in the fall of Bear Stearns portrays CNBC as a bunch of loose cannons running around at their Englewood Cliffs New Jersey headquarters. 

As rumors about Bear's viability were widely circulating Bear CEO Allan Schwartz decided to appear on CNBC. Looking to quiet the rumor mill he wanted to pick the friendliest inquisitor. According to Vanity Fair, Schwartz feared the risk in picking the wrong CNBC correspondent for the interview.

All the network's talent -- Gasparino, Maria Bartiromo, Faber, Larry Kudlow-had requested the interview, and whoever didn't get it, Schwartz feared, might retaliate on the air. "Each of these correspondents has his own producer, and they all seem to hate each other," one Bear executive told me. "If you choose Faber, you know Bartiromo will bash you the next day." Schwartz directed Russell Sherman to identify the CNBC executive who supervised the correspondents, explain the situation, and ask that the correspondents who didn't get the interview refrain from attacks. Sherman, however, couldn't identify a single CNBC executive who seemed to have control over the correspondents. "Everyone on Wall Street knows the joke," says another Bear executive involved in the discussions. "At CNBC, there is simply no adult supervision."

This is not the first or last time CNBC finds itself at the vortex of a sticky situation. There isn't enough insurance available to cover the liability risk arising from GE's ownership of this cable channel.  An excellent example of the kind risks they face is a February interview where New York Insurance Superintendent Eric Dinallo told William Ackman, head of New York hedge fund Pershing Square Capital Management, to be careful with some of his criticisms of monoline bond insurers Ambac and MBIA. Firms that Ackman was aggressively shorting at the time and waging a public relations war to run down their price. Dinallo noted that New York State law prohibits false statements about the financial condition of state-regulated insurance companies. These are criminal statutes.

GE is close to an untenable position in managing NBCU. If they exercise due care and supervision, the producers and talent will scream interference. If a major incident occurs with their talent and content, the parent corporation will be held liable.

GE is under no pressure to sell. They can dispose of NBCU at a time and place of their choosing. Selling after a successful Olympic run could present an ideal time to get out from under a business that is obviously incompatible with GE's business goals and objectives. A company like News Corp with Rupert Murdoch at the helm is far better situated to control this kind of risk.

GE's inherent risk is product liability and finance-related. Risk arising from media and entertainment businesses is a different dimension for GE.