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Is media mogul Barry Diller poised to do a deal with Walt Disney (USAI), is likely to do so. But no, it won't involve a merger of the two companies. Not yet, anyway, they add. Instead, they think Diller will create a joint venture with Disney to establish two TV stations, commonly called "duopoly positions," in each of USA's major TV markets.
"Barry and Mike Eisner go a long way and have worked together, dating back from their days at Paramount," says investor maven Mario Gabelli, whose family of mutual funds owns some 10.5 million shares of USA Networks.
The other networks already have duopoly positions: CBS is now a part of entertainment giant Viacom. NBC has a deal with Paxson Communications (CCN), which owns TV stations through its 80%-owned BHC Communications unit.
VAST OUTLET. Disney owns the ABC network and about 10 TV stations. "ABC doesn't yet have substantial duopoly positions in its major TV markets, and they would be a great match for USA Networks," says Vinton A.G. Vickers, media, broadcasting, and entertainment analyst at Chase H&Q.
"We think one possible strategy is to form a Disney-USA Networks joint venture that would enable USA to share Disney's content -- its shows, films, and news programs," says Vickers. Disney has a "tremendous library" of filmed entertainment that USA Networks could provide to its local outlets, he adds. And Disney could also serve as a vast outlet for USA's various products and services.
Vickers says such a deal with Disney to establish duopoly positions in its important TV markets is one of the options open to Diller to drive up shareholder returns.
For a fast-growing media and entertainment company with attractive properties in electronic retailing and information services, USA Networks hasn't exactly wowed investors. The stock had been seesawing all year between 16 and 20 a share -- until early August, when it suddenly sprung from 21 to 25. It's currently trading at 24 1/2.
"MARGINALIZED." Fresh interest in the stock was inspired by News Corp.'s move to acquire Christ-Craft. Not only did the deal enhance the price of TV-broadcasting properties but it also suggested that USA Networks would now be compelled to move to enhance shareholder value.
"Despite management's impressive track record, USA Network shares continue to trade at a discount to other diversified media and entertainment companies," notes Vickers. Based on adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), USA is trading at around 13 times Vickers' 2000 EBITDA estimates, vs. an average of 17 times for its peers.
Analyst Katherine Styponias of Prudential Securities, who rates USA a strong buy, says investors had been worried that USA has become "too small and marginalized" to compete with rivals AOL-Time Warner and Viacom-CBS. But she thinks shares of USA are headed higher.
For one thing, now that Seagram -- which owns a stake of more than 45% in USA Networks -- has agreed to merge with France's Vivendi, Styponias thinks that deal is a positive for USA because Vivendi Chairman Jean Marie Messier has made it clear that he won't prevent USA from growing larger. Before Seagram agreed to be acquired by Vivendi, Seagram CEO Edgar M. Bronfman Jr. had scuttled Diller's attempts to make big acquisitions because Bronfman didn't want Seagram's USA stake to be diluted.
BUY IT ALL? Some observers speculate that USA may spin off its information and services division. But here's a more intriguing possibility: Vivendi may just opt to buy USA Networks entirely before Disney does it. USA's attraction is that it's positioned to capitalize on the convergence of traditional and new media because of its diversified mix of important media and electronic-commerce assets, including Home Shopping Network (HSN), Ticketmaster, and Hotel Reservation Network.
Big stakeholders in USA include Microsoft co-founder Paul Allen, who has a 10% stake, and Liberty Media, headed by John Malone, which owns 5.5%. Most analysts think Diller isn't in any mood to sell because his vision is to make USA a major media and entertainment company. But if Vivendi -- or Disney -- comes up with a convincing buyout price, and with some nudging from Allen and Malone, Diller may yet say yes.
A spokeswoman for USA says the company is "opportunistic and continues to talk with everyone out there to seize on for good opportunities." But she wouldn't comment specifically about speculation on talks with either Disney or Vivendi.
Copyright 2000, Bloomberg L.P.
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