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Committed But Not Engaged

There is no Vivendi/NBC deal. This may be surprising given all the excitement over Vivendi Universal and General Electric, the announcements, the big press conference in Paris, and especially NBC Chairman Bob Wright's triumphant visit to Universal Studios last Wednesday.

What GE has done is persuade Vivendi to chase away the last of the six suitors for its U.S. media division, an investor group led by Edgar Bronfman Jr. and backed by Cablevision Systems Corp.

Typically, a seller would do that only after signing a definitive sale agreement. But, in this case, GE eliminated Vivendi's other options without actually committing to buy VUE, persuading Vivendi CEO Jean-René Fourtou to negotiate exclusively with GE and no one else for four weeks.

The broad structure has been worked out. NBC and VUE would each contribute its U.S. media assets into a new company valued around $42 billion. NBC's assets would be valued at $28 billion, VUE's at $14 billion. Even though Vivendi is contributing 33% of the assets, its actual equity stake shrinks to around 20%. First, Vivendi would lay off $1.6 billion in debt on NBC Universal. Then GE has committed to issue Vivendi $3.8 billion worth of its common shares, perhaps at closing, perhaps later.

Both Barry Diller's InterActive Corp. and Diller personally would hold around 1.5% of VUE's equity.

(Interestingly, VUE and NBC's revenues are roughly equal, around $7 billion. But VUE generates far less cash flow: $1.1 billion vs. NBC's $2 billion, which pretty much sums up why VUE's stake is smaller and, of course, why Vivendi's a seller.)

GE isn't putting up any cash, but Vivendi can get immediately some immediate money out of the deal through GE's commitment to pay stock.

On Wall Street, Vivendi could easily turn that into cash (deferring taxes, no less). An obligation by a major company (GE) to deliver a certain value of widely traded securities (GE common stock) at a certain time is the foundation of a big chunk of the derivatives market. An investment banker can readily line up institutional buyers who would buy derivatives built around obligations from GE. The goal is to let Vivendi immediately extract the $3.8 billion.

Vivendi would then be able to sell more of its NBC Universal stake to GE beginning in 2006.

Until a year ago, Vivendi and Diller's InterActive Corp. were partners in the Internet and media venture. They split up when Vivendi bought USA Network and Sci Fi Channel from InterActive.

That whole transaction was tax-free, but shuffling assets could pull triggers that would leave Diller on the hook for more than $2 billion in taxes. He indicated last week that he's sure an amicable arrangement is possible.