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Comcast Closes in on NBC Deal

NEW YORK - Jay Leno may want to think twice the next time he cracks a joke about a cable guy.

Comcast, the No. 1 cable and broadband provider, appears poised to complete a potentially ground-shaking deal that would give it control of the comic's employer: NBC Universal, now owned by General Electric.

The path became clear this week. GE agreed to pay Vivendi about $5.8 billion for its 20% stake in NBC Universal, according to executives briefed on the negotiations but who asked to be unnamed because they are not authorized to discuss them.

With that done, GE and Comcast can put the final touches on negotiations to create a new company, run as a joint venture, to house NBC Universal. It's a power in movie production, theme parks, the Internet - and especially television with NBC and Telemundo, and cable's USA Network, Syfy, MSNBC, CNBC, Bravo and Oxygen.

Each evening, about 20% of all TV viewers tune in to channels that would be in the joint venture -including Comcast's E! Entertainment Television, Versus and several regional sports networks, Bernstein Research calculates.

Comcast would end up with 51% of the venture after contributing its channels and about $6 billion.

An agreement valuing all of NBC Universal at about $30 billion would "absolutely be a blockbuster deal," says investor Leo Hindery, who used to run AT&T Broadband. In the second year of "the greatest malaise to ever overhang the media industry, it shows the fundamental value of these (media) assets and that their future prospects are better than current market conditions would suggest."

It also would assure Comcast CEO Brian Roberts a seat at the table - possibly at the head - as companies debate the most important new issue in media: Who'll decide what consumers can and can't do as video, audio and text slosh between TVs, computers, smartphones and devices that haven't even been invented yet.

Roberts "is in a position to drive the implementation model," says Cisco's Murali Nemani. "He can rally the industry to accelerate the transformation to this new experience."

Comcast has other strong reasons to want a deal.

There aren't that many new homes to wire for cable after the collapse of the housing market. And with unemployment at 10.2% in October - its highest rate since 1983 - consumers are losing enthusiasm for additional channels or services that would increase monthly bills.

"Comcast can't grow shareholder value by doing more cable," Hindery says. "There've been deals in the past where a big company's getting bigger. This is big getting different."

Roberts tried once before in 2004, when he offered Disney shareholders $66 billion in a hostile run at the Magic Kingdom. He dropped the effort, partly due to objections from his investors.

Roberts especially covets cable channels. They're golden these days because they have a dependable source of revenue from cable and satellite companies that pay monthly fees to distribute their programming. Channels also sell ads. "He sees these as attractive assets that are undervalued, and he envisions the role of CEO, in part, as a portfolio manager," says Bernstein Research analyst Craig Moffett.

NBC Universal could help Comcast achieve other important goals:

Control programming costs. A deal would relieve one big Comcast concern: TV stations are beginning to charge cable and satellite companies as much as $1 per subscriber per month to carry their must-see shows. Roberts can play both sides once he controls NBC's stations.

Promote video on demand. Comcast would benefit if Roberts orders Universal Studios to release its hit films to home video, especially to Comcast's VOD service, while they're hot. Comcast has struggled to excite customers to pay for movies they already had ample opportunity to see in theaters and on DVD.

Theater owners may object if Roberts sends movies to home video too quickly. Exhibitors sell lots of tickets and popcorn to people who want to see flicks while everybody's still talking about them. If films still have that buzz when they hit home video, folks may choose to watch in the comfort of their living rooms.

Become a sports power. Comcast could rival ESPN's appeal to sports fans if the cable company controlled NBC, which broadcasts the Olympics and Sunday night NFL games. Comcast already has skin in the game: In addition to Versus and The Golf Channel, Comcast SportsNet regional channels serve California, Chicago, Boston, Seattle, Philadelphia, New York, Washington, D.C., and Portland, Ore.

Still, Roberts will need all the charm and persuasive skills he can muster to reach the finish line. Many shareholders fear that Comcast will end up with a money pit, not a bargain on a fixer-upper. Collins Stewart analyst Thomas Eagan says he'd rather see Comcast give cash back to shareholders, for example by buying back stock, instead of spending it on assets that have "ambiguous revenue potential."

Comcast shares are down 11%, to $14.96, since early October when news broke of the company's talks with GE.

NBC poses the biggest challenge. Its prime-time shows account for about 10% of NBC Universal's revenue and profit, but the network is No. 4 in that competition. In November, it averaged 7.3 million viewers, down 5% vs. the same month last year.

NBC made a risky decision to run Leno's comedy talk show at 10 p.m. instead of scripted dramas, sitcoms and reality shows that typically are more popular but costlier.

Prospects for Universal Studios also are cloudy: With disappointments including Bruno, Land of the Lost, Funny People and Public Enemies, its films have generated $824.5 million in ticket sales this year, down 17.9% vs. the same period last year.

Further complicating matters is an industrywide decline in DVD sales and rentals.

GE chief Jeffrey Immelt appears to have concluded that NBC Universal added glamour, but lately not much else, to a company best-known for its global sales of things such as aircraft engines, nuclear reactors, appliances and medical imaging equipment.

With all of these problems, Comcast's desire to cut a deal seems to have been inspired by "boredom and a desire to do something else," says Columbia Business School professor Bruce Greenwald, co-author of a new book The Curse of the Mogul: What's Wrong with the World's Leading Media Companies.

"The long-term return (on investment for Comcast's deal with NBC Universal) is probably between 4% and 5%," he says. "For all of the risks associated with a changing media environment, it's just not an adequate return."

Shareholders would have to overwhelmingly object to make a difference: Roberts controls one-third of the company votes.

The most intriguing question is whether antitrust officials and the Federal Communications Commission might put up a fight. This would be the first major media merger to be reviewed by the Obama administration.

Consumer advocates have their knives sharpened. "The pundits who predict that this merger will be a slam-dunk have not done the careful analysis of the damage that it will do to the competitive fabric of the video marketplace," says Mark Cooper, research director at the Consumer Federation of America. "This is a new administration that's inclined to reinvigorate antitrust."

The smart money is betting that, instead of blocking the deal, the administration will approve it as long as Comcast agrees to restrictions on business practices that might give it too much power over competitors or raise prices for consumers. "The playbook for how you would create value from a vertically integrated media company is pretty well understood," says Moffett. "The problem is, it's mostly against the law. And the parts that aren't (likely will be subject to) specific conditions that get applied to deals like this."

Regulators could tell Comcast to sell its most popular networks and programming to satellite and phone companies, without charging a super-high price. News Corp., which owns Fox, made a similar promise in 2003 when it took control of DirecTV, which it later sold. That might be a bitter pill for Roberts, who has skirmished for years with DirecTV over pricing and other terms to carry Comcast's Versus and regional sports networks.

And there's no telling what other conditions officials might demand. They could require Comcast to unload properties in markets such as Philadelphia and San Francisco, where it has clusters of cable systems and NBC owns TV stations, if they conclude that the merged company would have too much power.

Officials also may see the deal as a chance to address broader concerns. For example, the FCC has long discussed plans that would allow customers to buy channels on an à la carte basis. FCC Chairman Julius Genachowski also favors net neutrality, a requirement for Internet service providers to treat all sites equally.

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