BUSINESSWEEK ONLINE : JULY 3, 2000 ISSUE
COVER STORY How Vivendi Could Become USA Networks' Rich Uncle Diller's ambitious growth plans may see the light of day under the new owner's tutelage You expect the stock of an acquisition target to rise when news of an impending deal breaks. As expected, Seagram (VO) shares climbed about 13% on June 14, when it confirmed it was in talks to be acquired by French conglomerate Vivendi. But you don't necessarily expect the stock of a minority holding of the acquisition target to also spike -- unless the purchaser is seen as a much better parent company. That's exactly what has recently boosted the shares of USA Networks, which is chaired by media mogul Barry Diller and owns a hodgepodge of cable, shopping, and Internet assets. Those assets include USA Network, Home Shopping Network, the Sci Fi Channel, and a controlling interest in Ticketmaster Online-CitySearch. USA, which is 43% owned by Seagram, rose 11%, to $21 1/4, on June 14. The next day it climbed an additional 11/2 points, or 7%, to $22 3/4, while Seagram's share price flattened out. "I was a little curious as to why," admits Angela Auchey, who follows media companies for Federated Investors and has not been particularly fond of the company. But the stock, still well below its high of $29 1/16 on Jan. 10, now deserves a second look, she says. USA shares closed at $23 on June 22, up 35% from their 52-week low of $16 7/8 on Apr. 17. DISTRIBUTION. Investors are hoping Vivendi will make Diller's grand growth plans happen. Vivendi can jump-start USA Networks' international expansion. Then Ticketmaster-City Search could be distributed over Vivendi's new Internet portal, Vizzavi -- and the Home Shopping Network and Sci Fi Channel over Vivendi's 49%-owned Canal+ paid-TV station -- to name just two more possibilities. But more important to shareholders -- and not as readily apparent -- are hopes that the new Seagram owners would allow Diller more flexibility to make large acquisitions. Seagram kept tight reign on Diller's acquisition plans, including his designs on NBC (see BW, (see BW, 7/03/00, "Has Barry Diller Found a Soul Mate?"). Seagram's original shareholder agreement, which Vivendi would inherit, gives it the right to quash any deal where USA would spend more than 10% of its market capitalization (or about $1.7 billion, given that its market cap is now nearly $17 billion). Analysts say Seagram, which needed to maintain its 43% stake in USA to maintain a growth-stock profile, used that right to block USA from using stock to pay for a large acquisition since that would have diluted its equity stake. In theory, Seagram could have bought more shares to increase its holdings, but it didn't choose to allocate its limited capital that way. It was the key factor standing in the way of Diller's ambitious plans. SHARED GOAL. "That factor could be over now," wrote SG Cowen analyst Edward Hatch, who has a price target of $30 and rates the shares a "strong buy," in a June 14 research note. That's partly because Vivendi could offer greater access to capital and partly because the USA stake wouldn't be such an important part of a much bigger company. But it's more than just the terms of the agreement. In the relationship-driven media business, Diller's and Vivendi Chairman Jean-Marie Messier's goals of integrating old-media and new-media assets seem tightly aligned. Analysts believe that Diller has been chomping at the bit for more freedom. Although they don't know what he will do next, giving him that freedom is a good thing, they say. "You were at a stalemate," says strategist Barry Hyman of Ehrenkrantz, King, Nussbaum. "Anything that breaks that stalemate is a positive." Calling Diller, "one of the handful" of media geniuses, he says "he now has the ability to do something on a larger scale." Hyman adds: "That's the only way for USA to really get beyond its niche status." Hatch commends Diller's record on acquisitions, pointing out that USA's $500 million takeover of Ticketmaster is worth about $1.5 billion today and its stake in Hotel Reservations Network has climbed from $150 million to $1.1 billion. "The past never guarantees future acquisition success, but we like this batting average," wrote Hatch in a June 22 note. STILL UNCLEAR. Federated's Auchey is a bit more skeptical. "People really do bow down to him," she says. While she thinks the Vivendi-Seagram deal makes the stock more attractive, there are a lot of uncertainties remaining. It's unclear whether the big egos at USA and Vivendi can work together. At this early stage, USA Networks is mum on its view of the merger possibilities. There is also a chance that USA could buy out Seagram's stake or that Messier could try to buy USA outright. But analysts believe Seagram will maintain its equity stake under Vivendi. Still, there are other risks for investors to be mindful of. A new red flag cropped up on June 21, when USA announced that the president of the network, Barry Baker, is resigning. Hatch thinks the timing is a coincidence and that Baker wanted to run his own company rather than just execute Diller's strategy. Meanwhile, USA is near the end of a court battle, as it attempts to hang onto its lucrative contract with the World Wresting Federation. The WWF says it got a better offer from Viacom. The judge in the case recommended recently that the parties negotiate a resolution, but an 11th-hour settlement seems unlikely. The judge is set to rule later this month. Loss of the WWF contract, which generates $10 million to $15 million in cash a year for USA, would be a negative for the stock, while a win would give it a boost. "That has been an overhang on the stock for sure," says Hyman, who has a $35 price target and deems USA shares undervalued. Vivendi's deal with Seagram has already proved to be a positive development for USA shareholders. But new investors might find it prudent to wait for these high-rolling dealmakers to put more of their cards on the table -- before anteing up themselves. By Amey Stone _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Vivendi: Going Hollywood COVER IMAGE: Vivendi: Going Hollywood PHOTO: Vivendi Chairman Jean-Marie Messier TABLE: Messier's Master Plan TABLE: Jean-Marie's Universe TABLE: Messier's Metamorphosis Has Barry Diller Found a Soul Mate? ONLINE ORIGINAL: How Vivendi Could Become USA Networks' Rich Uncle INTERACT E-Mail to Business Week Online

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