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CBS is feeling GM's pain via a downgrade on its debt rating to BBB- by Standard & Poor's on June 5. So, could CBS' peers suffer the same fate? The fact of the matter is revenue gaps once filled by GM money spent on broadcast advertising will take a long time to be filled. Nonetheless, chances are slim for the immediate future that CBS' peers -- namely Walt Disney Co. (NYSE:DIS), News Corp. and Viacom Inc. (NYSE:VIA) -- will be downgraded because they appear to be in a much better financial position with a greater revenue pool to offset a sharp decline in GM ad spending. But if things deteriorated down the road, the likeliest candidate on paper for a downgrade may be conglomerate GE. The contribution of GE's media and entertainment unit, NBC Universal, to a downgrade of the parent company will be a small -- yet a visible one -- given the unit only contributed 9.3% of the conglomerate's revenue last year. Additionally, NBC Universal's revenue fell 45% in April, dragged down by the usual culprits of weak advertising for its broadcast television and online units, as well as declining attendance at its theme parks. The loss of GM ad spending will likely push NBC Universal's revenue even lower. In the end, however, NBC Universal alone wouldn't drag down GE's rating. But could it be the little push in conjunction with GE Capital that sends GE down? If there's any one unit that would drag GE to a downgrade, it would be GE Capital, which contributed 36.7% of the conglomerate's revenue last year. In fact, the parent company already lost its top-tiered AAA rating in March, dropping to an investment grade AA+ rating with a stable outlook from S&P primarily because of "the prospects of weaker earnings or a 'modest net loss' at GE Capital." GE was one of just six nonfinancial companies to have the AAA rating and had held that rating since 1956. Despite the March downgrade, the company has still been able to hold on reasonably well during the recession with first-quarter earnings of 26 cents a share, surpassing the expectations of Wall Street analysts, polled by Thomson Reuters, of 21 cents a share. But those numbers weren't necessarily accepted by all in the Wall Street community. "GE for years has been nothing but a hedge fund masquerading as a company with a lot of high-risk bets and accounting tricks," portfolio chief and president Peter Schiff of Euro-Pacific Capital told the New York Post. "They were always able to make their predictable earnings like clockwork because they pulled out the earnings [from GE Capital] when they needed them to even it all out." If some of those high-risk bets at GE Capital bubble on the downside, paired with GM's advertising spending declines, an AA+ rating from S&P might be too high for the conglomerate. The rating agencies these days are looking to be more cautious since being put in the spotlight by the government for missing the credit crisis and corporate collapses at Enron Corp. and Worldcom. It's troubling that GE has publicly stated a profit target of $5 billion for GE Capital back in December, while other analysts, such as Nicholas P. Heymann of Sterne, Agee & Leach, have pared down their profit estimates from $2.8 billion to a more conservative number of $900 million, according to a New York Times article. And if another downgrade happens to GE, CEO Jeff Immelt will likely repeat what he said when his company was downgraded in March: "We will continue to run GE with the disciplines of a AAA company." - Gerald Magpily
CategoriesComments
From: Anne ,
This is Anne from GE and I feel compelled to comment on this story, the premise of which is tenuous at best. While decreased ad revenues from a major advertiser impacting credit agency ratings at CBS is understandable given the composition of its portfolio, applying the same logic to a conglomerated in which media revenues don't even comprise 10% is quite a stretch. Having admitted as much, the author then shifts focus to GE Capital, a business that earned $1.1 billion last quarter and remains on track to be profitable for the full year. S&P's latest rating of GE Capital (in March) characterized that business as having a "very strong capacity to meet its financial commitments" and suggested it was unlikely to change that rating in the next 6 months to two years. Moody's latest rating of GE and GE Capital specifically called out that GE Capital had "successfully strengthened its capital and liquidity to better protect its global business" in the current economic environment. It, too, envisioned a stable outlook for GE and GE Capital. As for GE's industrial business -- the final piece of the puzzle and the one not included in the author's story -- that part of the business was cited by Moody's in its latest rating as having "strong AAA characteristics, including a diversified portfolio of market-leading businesses that generate strong and durable profits and cash flow through [economic] cycles." While it's impossible to say with certainty what will happen in the future, action like that described in this Dealscape story seems a far cry from what happened at CBS.
Posted on:
June 8, 2009 5:52 PM
From: Dan Gosselin,
Sir,
Posted on:
June 8, 2009 6:42 PM
From: James Butler,
The worst thing aboud NBC is that it is such a liberal network and all its reporters only give the Democrat side of anything. People are just tired of such a shallow mentality.
Posted on:
June 8, 2009 7:36 PM
From: Roger Smith,
Ge is in trouble. Let's face it. Yes a GM bankruptcy won't totally sink GE but the misguided risk taking that GE Capital has taken that every US taxpayer is now paying for will. The corporates at GE won't admit their mistakes, they'll just blame everyone except themselves. Citigroup is doing it. AIG is doing it.
Posted on:
June 8, 2009 10:00 PM
From: bear_m,
Peter Schiff, not "Peter Chiffon," heads Euro-Pacific Capital. The Chiffons were a music group and an inspiration for GE management. Jeff Immelt is certainly a "Sweet Talkin' Guy," especially on dividends. The business press kept singing, "He's so fine" during Jack Welch's tenure. Yet, given Welch's Madoff-like earnings consistency, GE's more cynical shareholders had to wonder "Is this a lasting treasure? Or just a moment's pleasure? Tell me now and I won't ask again. Will you still love me tomorrow?"
Posted on:
June 9, 2009 2:01 AM
From: Bob Frost,
GE tops all companies. Well run. They know what they are doing.
Posted on:
June 9, 2009 8:03 AM
From: Bob Frost,
GE THE BEST RUN COMPANY. THEY STAY ON TOP OF THEIR BUSINESS.
Posted on:
June 9, 2009 8:05 AM
From: Erik,
Look at the numbers: CBS lost $11B in 2008 on the net income line, and has posted a slight loss for 1Q09. They have $26B in assets (incl $15.5B in goodwill and intangibles) and $18B in Liabilities. With one more year of similar performance they will eliminate all of their Equity and not have the current assets to offset it. In contrast, NBCU had a profit of $3B in 2008, which was flat from 2007. It also posted a profit of $0.4B for 1Q09 (which was about half of 1Q08). I don't see a similarity between the financial health of these two companies.
Posted on:
June 9, 2009 2:23 PM
From: Debbie Owens,
Call me stupid, but I bought GE this past
Posted on:
June 9, 2009 6:48 PM
From: Vince,
GE's root problem of GE Capital can never be explained. It's invested in so many complicated products and hid those investments in funny accounting that even the SEC wouldn't be able to figure it out. The loss in revenue from GM ad revenue is small like the author says but any loss is significant when your teaming anything with something as unpredictable as GE Capital. Wake up people the rating agencies are only trying to protect their behinds and anything suspicious will be flagged unlike the gravy days of just a few years ago ...
Posted on:
June 9, 2009 9:48 PM
From: Gerald,
There's no doubt that a potential GE debt downgrade is more dependent on how GE Capital does than a drop in media earnings from a decline in GM advertising. The combination of the two might just be enough to trigger a review by rating agencies such as S&P that have become more conservative in the wake of deep criticism for their inaccurate ratings of debt obligations that helped trigger the credit crisis. S&P already did that in March as it downgraded its debt rating on GE attributing it to "the prospects of weaker earnings or a 'modest net loss' at GE Capital." ...
Posted on:
June 10, 2009 10:53 AM
From: SB,
Things are already priced both in ratings and the pps. S&P and Moody's have acted to cover their backs and IMHO no ratings changes will be there in the near times. Power projects like Nuclear in India, Abu Dhabi and in US; Alternate Energy in Wind, Biofuel, Solar and FuelCell; Transmission and Distribution; Servicing of Engines, equipment, Supplying to oil and gas projects and infrastructure projects as well as dividend cut will more than offset the reduced earnings if any in the finance and media divisions
Posted on:
June 10, 2009 6:27 PM
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Fifty years ago there were few names in American business culture as venerable as CBS Corp. (NYSE:CBS), General Electric Corp. (NYSE:GE) and General Motors Corp. Times change, and all still exist, but they face very different circumstances. 
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ge will be fine. another doomsayer