This week, Comcast (CMCSA) and General Electric (GE) reported that Comcast shall acquire GE's minority stake in NBC Universal and take sole control of the media business in a deal valued at $16.7 billion. The substantial payday should give GE the capital it needs to make some targeted acquisitions, fuel its share repurchase plans and/or increase the company's dividend in 2013. The company will receive $12 billion in cash, $4 billion in Comcast-backed debt and $700 million in preferred stock.
GE now plans to buy back as much as $10 billion in outstanding shares in 2013. The company's already existing share repurchase was also increased and now has about $23 billion in further buybacks remaining through 2015. GE also looks likely to again raise its dividend. At the end of 2012, the company increased its dividend by 12 percent, or $0.02, to $0.19 per share, and has routinely increased its dividend since cutting it in 2009, in the wake of the sub-prime crisis that caused billions in losses to its GE Capital unit.
Outside GE's dividend and share buybacks, the company has been looking for strategic industrial acquisitions. GE's Chief Financial Officer, Keith Sherin, stated, "We obviously have the flexibility to do more M&A, or maybe even more buybacks, depending upon the opportunities we see out there." The last M&A activity by the company was its $4.3 billion purchase of Italian manufacturer Avio SpA's aerospace parts business. Other recent acquisitions include Fairchild International and Industrea, which are both mining equipment companies. Sherin also indicated GE would likely avoid larger acquisitions and instead seek out smaller bolt-on deals for its already substantial industrial segment.
GE first took ownership of NBC through its 1986 acquisition of RCA. NBC Universal was formed in 2004 through the merger of General Electric's NBC with Vivendi's (VIVHY.PK) Universal Entertainment. In late 2009, GE agreed to sell a 51 percent stake in NBC Universal to Comcast for $9.8 billion in cash, though the deal was not completed until 2011 due to regulatory hurdles. Some such hurdles could also delay this present deal, as NBC Universal is a substantial media business and Comcast's dual role as a television content and service provider may draw antitrust scrutiny.
Beyond purchasing the 49 percent of NBC Universal that it didn't already own, Comcast will also acquire related studio properties at 30 Rockefeller Center in New York City and in Englewood Cliffs, New Jersey. These properties will cost Comcast an additional $1.4 billion. Including this property sale, the deal total comes to $18.1 billion.
Most of GE's cash is tied up within GE Capital, its substantial financial unit, due to capital requirements for it to maintain large cash reserves. Additionally, GE holds a significant portion of its cash overseas and has continued to do so in order to avoid paying any repatriation tax on it. Over two-thirds of GE's cash, including GE Capital's, is held internationally.
The increased capital from this deal should also give GE the capability to refinance some of its substantial debt load at a favorable rate. Last quarter, General Electric sold $7 billion of bonds at an average yield of 2.58 percent, which was roughly 10% below the average rate paid by domestic investment-grade issuers. The company noted that it would use the funds to satisfy already existing and higher yielding debt. Replacing higher yield obligations with newer lower yielding paper makes it easier for GE to free up its cash flow for repurchases, dividends and increasing the net worth of the company through acquisitions.
After GE's capital position is fortified by this deal, the company is likely to further refinance its debt and take advantage of the historically low interest rates that continue to exist. Further refinancing will make it easier for the company to increase its dividend and expand its share repurchase plans, as well as fund any additional industrial acquisitions it will likely soon attempt. The company also indicated that it expects to save $2 billion through 2014 due to cost reductions associated with the sale of its NBC Universal stake.
General Electric increased its dividend in the fourth quarter of each of the last three years, and has increased its divided five times in the last three years. After reducing its quarterly dividend in 2009 from $0.31 to $0.10, the dividend has grown by 90 percent to $0.19. In order to reach its pre-crisis level, GE's dividend must still increase by an additional 63 percent. The company's aggressive desire to raise its dividend over the last three years and recent activities indicate another dividend increase is now highly probable in 2013.
Disclosure: I am long GE.
Additional disclosure: A family trust holds shares of VIVHY.PK