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Synergy Equals $500M

In signing a definitive agreement to merge Vivendi Universal Entertainment into NBC last week, NBC Chairman Bob Wright shed some light on how he plans to squeeze money out of the new media giant. But he remained silent on what employees and other industry players really want to know: how the TV operations will be restructured.

Wright said he will wring up to $500 million out of NBC Universal in the first year, mostly by cutting costs but partly by exploiting new opportunities to juice revenues. The expense reduction will come in unsurprising ways: headcount, combining overlapping departments, smarter purchasing and unloading Los Angeles real estate.

The revenues will come by increasing the ad-sales power of VUE's USA Network and Sci Fi Channel and exploiting Universal Television's output over at NBC.

"Together, these companies have about $11 billion worth of costs," Wright said in an interview. "You ought to be able to get 3% out of $11 billion."

However, Wright said he does not see big flaws in VUE's TV operation, the parts of the portfolio he coveted far more than the Universal movie studio or theme parks.

The deal creates a new media giant, linking NBC—the last broadcast network without a Hollywood studio in the corporate family—with Universal Studio. It expands NBC's news-heavy cable-network portfolio, adding USA, Sci Fi and startup Trio to its existing CNBC, MSNBC and recently acquired Bravo.

Expected to generate $13 billion in annual revenue, NBC Universal would still lag six other U.S. media players: Time Warner, Walt Disney, Viacom, Comcast, Sony and News Corp.

The deal formalizes a proposal that GE made four weeks ago. NBC and VUE each agreed to 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. Although it would contribute a third of the assets, a flurry of financial moves will leave VUE parent Vivendi with just 20% of the venture's equity. U.S. foreign-ownership restrictions prevent Paris-based Vivendi from owning more than 20% of NBC's TV-station group.

The major change from the initial proposal is that Vivendi will get some immediate cash out of the deal. Initially, Vivendi was to raise $3.8 billion through complicated maneuvers anchored by "puts" obligating NBC parent GE to buy chunks of Vivendi's stock over two years. GE had proposed that Vivendi structure a derivative around that obligation, which an investment banker would resell to large institutional investors.

But the actual agreement dispensed with that. GE will now simply get $3.8 billion worth of GE stock, although $500 million of that will go to VUE's minority shareholders, including Barry Diller, partly through his InterActive Corp., partly personally. Vivendi can sell the stock after the deal closes.

Vivendi has two windows to sell GE part of its VUE stake: $3 billion worth in 2006 and another $4 billion in 2007. If it doesn't choose to sell, GE can force Vivendi to cash in all of its stake in 2009.

NBC's first task will be putting VUE through "the GE Workout," the company's rigid method of financial and operational management. The company applies the system to all its industrial, financial and media acquisitions, ruthlessly looking for expenses to cut and traditional business practices to toss and plowing under internal hierarchies deemed inefficient. "I can't even imagine the things to come," said one VUE executive.

Wright can imagine a few. He sees a $400 million-$500 million "opportunity" in the combination during the first year of operations. Part of that—$85 million-$125 million—comes from boosting revenue. The rest—$315 million-$375 million—comes from expense reduction.

Wright contended that he's not looking to swing a giant knife through Vivendi but rather a chisel to chip out lots of costs or secure greater volume discounts. "The savings come from the way we buy things. We'd be buying more advertising. We'd probably be able to get more work done with fewer people, putting two groups into one. We can save money on facilities. We can save money negotiating better [advertising] deals with newspapers, magazines, trade magazines, things of that nature."

As an example, Wright noted to investors that "we have tremendous acreage" at NBC's Burbank, Calif., facilities and VUE's Universal City. "There are many opportunities to combine the two in one campus. That's a perfect example, a lot of facilities around the country that we can mutually use. There's just plenty of places to go here."

He sees the company marshalling all of its promotional capabilities—even from the NBC News division—to boost Universal's movies. He laid out a scenario in which Universal's recent Seabiscuit
could have been run through the mill: Star Tobey Maguire featured on Bravo's Inside the Actors Studio; NBC's Dateline doing a segment on Seabiscuit: The True Story; Maguire on the Tonight Show; a Today show theme "At the Races"; coverage of the premiere on Access Hollywood; and more of the same leading up to the DVD release.

The company also released a graphic showing that most of NBC Universal's cable networks labor under a giant CPM gap, with Sci Fi and USA selling ads for 60%-73% less per thousand viewers than NBC itself fetches. If NBC's power in the ad market can boost the cable CPMs up just slightly, Wright sees an extra $45 million or so in sales.

The future of some executives is clear. Randy Falco adds the ad-sales, affiliate-sales and administrative functions of VUE's cable networks. Wright wants to retain VUE President Ron Meyer to run the studio and theme parks (which are pretty much an afterthought in this deal) and Universal Pictures head Stacey Snider.

He was less specific about the precise domain of NBC Entertainment President Jeff Zucker, although he is widely expected to control all programming, marketing and promotion of NBC Universal's combined broadcast and cable operation.

The big question is how senior Universal Television executives will fare, notably Universal Television Chairman Michael Jackson, USA Network President Doug Herzog, and Sci Fi Channel President Bonnie Hammer. Ironically, industry executives widely assume that Jackson wants to move back to England, where he was CEO of Channel 4. But associates say he really wants to stay in America.