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On Paper, What's VUE Worth?

With Vivendi Universal S.A. and General Electric Co.'s NBC television unit locked in exclusive negotiations regarding Vivendi Universal Entertainment for at least the next 30 days, the question on a lot of minds is: What is VUE actually worth?

That has been the subject of much debate during the five-month auction process. But according to several analysts' reports, Vivendi's valuation of $14 billion for VUE — consisting of cable networks USA Network, Sci Fi Channel, Trio and NewsWorld International, as well as the Universal movie studio and theme parks — is not far off the mark.

According to the NBC deal, Vivendi would receive about $3.8 billion in cash at closing by selling its right to receive $4 billion in GE stock in the next two years, and GE would assume about $1.6 billion in VUE debt. The remaining $8.6 billion in value is based on the 20% interest Vivendi would receive in a combined NBC-Universal, including VUE, the NBC broadcast network, cable channels CNBC, MSNBC and Bravo and Spanish-language network Telemundo.

Although Vivendi did not break out details of its specific divisions, Fulcrum Global Partners cable analyst Richard Greenfield estimated that VUE's total cash flow was about $1.45 billion, with the bulk of that ($750 million) coming from film and television production. Greenfield estimated that the cable networks threw off about $600 million in cash flow, followed by the theme parks at $100 million.

In June, Janco Partners cable analyst Matt Harrigan estimated that VUE could be worth between $12 billion and $15.2 billion.

Based on Harrigan's report, USA and Sci Fi were worth the most — between $5.8 billion and $7.5 billion, followed by the film and television studios ($4.7 billion and $6.2 billion) and the theme parks ($1.5 billion). Harrigan also estimated that the cable channels were worth about 11.4 times to 14.9 times cash flow and the studios worth between 10.6 times and 13.8 times cash flow.

Given the $14 billion valuation of the deal — a tricky one, because Vivendi and NBC could assign virtually any value they wanted to the NBC-Universal stake — GE purchased VUE for roughly 12.5 times cash flow, comparable with industry valuations. According to Greenfield, the combined NBC-Universal is valued at $43 billion (assuming $8.6 billion represents a 20% stake) and would have combined cash flow of about $3 billion. At that valuation, NBC-Universal would be at the top of the range in the industry, where multiples range from 7.2 times to 12.6 times cash flow.

While the deal could still change dramatically — NBC is known to be a tough negotiator and has changed deal terms at the last minute in other transactions — there are also some potential pitfalls to a VUE-GE union.

According to a research report by Merrill Lynch & Co. analyst Steve Liechti, Vivendi could be saddled with up to $1 billion in additional costs from its relationship with former VUE co-CEO Barry Diller and his company, InterActiveCorp.

Diller personally owns a 1.5% interest in VUE, for which he has put rights in the event of a sale. Liechti said he expects Diller to exercise the put for about $275 million. In addition, InterActiveCorp has an ongoing dispute over tax liabilities with Vivendi, claiming it is owed about $620 million related to the tax on the 5% interest received every year on $2.5 billion in preferred stock IAC received as part of the deal that created VUE in 2001.

IAC values those tax liabilities at about $620 million and went to court to force Vivendi's hand. Although no decision has been made, Liechti said in the report that Vivendi keeps the litigation risk.

There is also an ongoing tax dispute regarding 156 million shares of DuPont Co. stock sold in 1995 by Seagram Co. Ltd. for $8.8 billion. Seagram used the proceeds of that sale to finance its purchase of Universal Studios and Universal Music Group.

Vivendi purchased Seagram in 2000.

The IRS has claimed that Vivendi owes it $1.5 billion in taxes and an additional $1.2 billion in interest as a result of the DuPont sale.

The IRS said it would challenge the tax treatment of the DuPont stock sale, although Vivendi claims its treatment was correct.

Vivendi has said it expects the IRS dispute to be resolved without having a material effect on its financial statements and that it has enough cash in reserve to pay the tax bill. Vivendi's April 2003 press release, the proceeds of the stock sale were treated as a taxable dividend and, in compliance with U.S. tax law, 80% of that amount was reported as an income tax deduction. The tax due on the remaining 20% was paid in 1995.