Vivendi Universal (V
) chief Jean-Marie Messier is on the prowl again. On Dec. 11, the boss of the French media conglomerate confirmed he was in talks with Barry Diller to buy the entertainment holdings of Diller's USA Networks (USAI
). The deal could be worth $10 billion or more and would give Vivendi access to more than 84 million U.S. television viewers. Messier says he also wants to forge an alliance in Europe with U.S. cable-TV magnate John C. Malone, whose Liberty Media (LMC.A
) also owns 21% of USA Networks.
Messier is clearly enjoying his new role as a media mogul. Over the past few months he has shed more than 30 pounds and moved his family into a Park Avenue duplex, jetting back regularly to Vivendi's Paris headquarters on the company plane. The 45-year-old Frenchman has the stage to himself now: On Dec. 6, exactly a year after Messier sealed the acquisition of Seagram Co. and its Universal media properties, Seagram heir Edgar Bronfman Jr. stepped aside as Vivendi's executive vice-chairman.
But Messier's latest round of wheeling and dealing is making some people nervous. Vivendi shares sank 5% after word of the Diller talks got out. One worry is Messier's tendency to blab about deals, even when he's nowhere near closing them. Sources close to Diller and Malone say that while both have talked some with Vivendi in the past year, no announcement is imminent. A source close to Messier confirms this and speculates that Messier may be trying to "prod things along" by going public.
Debt is another concern. Messier has already promised investors Vivendi wouldn't issue shares to finance a USA Networks acquisition, and that any such deal would involve putting up only a small amount of cash. Investors hope he keeps his word. Over the past year or so, Messier has run up nearly $18 billion in debt, giving Vivendi a 50% debt-to-equity ratio that's considerably above those of media companies such as AOL Time Warner (AOL
), News Corp. (NWS
), and Viacom (VIA
).
Messier's best bet would be an asset shuffle. Here's how it could work: Vivendi would give Diller the 43% of USA Networks that Vivendi now owns. Diller would walk away with full control of USA Networks' nonentertainment holdings such as Ticketmaster (TMCS
) and Home Shopping Network--plus, probably, a substantial cash bonus. In return, Vivendi would get full control of the USA Networks and Sci-Fi cable channels, as well as Studios USA TV, which produces such shows as Law & Order SVU and Maury. Messier would also love to sell Vivendi's 22% stake in British pay-TV operator BSkyB (BSY
) to Malone's Liberty Media. But British regulators could block such a deal because Liberty already owns 25% of British cable operator Telewest Communications PLC (TWSTY
), a BSkyB competitor.
NEW AUDIENCES. It's a tangled tale, but there's strategic logic at work here. Taking control of USA Networks would give Messier new audiences for Universal films, while developing new TV programming based on Universal's film library. Besides, despite Vivendi's stake in USA Networks, Messier has been unable to influence programming there: Diller has the voting rights to Vivendi's shares. Diller's control has frustrated Messier, who said recently: "I want to make sure we don't leave money on the table" by neglecting synergies between USA Networks and Vivendi.
Cozying up to Malone would have benefits too. Malone's Liberty Media Corp. recently acquired a majority stake in the parent company of Europe's biggest cable-TV operator, United Pan-Europe Communications. Liberty is awaiting regulatory approval for Malone's bid to buy six regional cable-TV networks in Germany from Deutsche Telekom (DT
). Messier would like to get Vivendi programming, such as its Thirteenth Street premium channel, onto Malone-controlled cable properties in Germany and Britain.
These are conventional distribution deals, but that's just what Messier needs. True, Vivendi is on track to post a healthy 35% increase in operating earnings this year, on sales up 10% to $50 billion, with strong showings from its Universal Studios and telecommunications holdings. Messier has wisely hedged its bets on the Internet, with first-half losses on its Web investments totaling only $90 million. Compare that with media rival Bertelsmann, which lost $790 million on its e-commerce business in the last fiscal year. Messier has reined in costs at money-losing Canal+, while Universal Music has wrung savings from its merger with PolyGram.
But despite a leading 22% percent market share, Universal Music Group revenues are sagging, and no quick payoff from Vivendi's online music ventures is likely. Other hoped-for bonanzas from the Net are proving harder to come by. It will be a few years before users of Vivendi's Cegetel mobile-phone unit can download music of Universal artists such as Limp Bizkit or Ja Rule on their handsets. In fact, even though Cegetel is one of his biggest moneymakers, Messier is expected to sell it because it's not hefty enough to compete with Europe's bigger operators.
LEFTOVER DRINKS. Meanwhile, regulatory delays and market weakness have delayed Vivendi's planned disposal of the former Seagram drinks business, as well as a professional publishing unit and its stake in BSkyB.
The failure to close these sales has kept the debt levels surprisingly high at Vivendi, which makes investors jittery. Analysts in France were startled in early December when Vivendi sold a 9.3% stake in its separately traded utilities unit, Vivendi Environment, to raise $1 billion. Only a few days before the sale, Vivendi Environment had issued a profit warning that pushed its share price down to its lowest level in 15 months--hardly an auspicious time to sell. "They seemed to be in such a hurry," says Edouard Tétreau, chief European media analyst at Crédit Lyonnais Securities. He downgraded Vivendi shares after the transaction, fearing Messier was about to embark on a new round of acquisitions. Tétreau figures Vivendi is already paying nearly $750 million annually in debt service and now is producing virtually no free cash flow. "It's no Enron, but it's a very leveraged company," he says.
Debt or not, Messier wants a deal, which plays to Diller's advantage. The longtime Hollywood player can afford to bide his time. USA Networks posted 18% revenue growth during the past nine months, with strong earnings from its entertainment business offsetting losses in Internet-related shopping services. Indeed, Diller's main motivation for accepting Vivendi's proposal could be that he's getting tired of Messier pressing for closer ties. "Barry doesn't like people looking over his shoulder, and that's all that Messier seems to be doing to him right now," a fellow media mogul says. A boffo deal could unwind this relationship and give satisfaction to all concerned. But first Diller has to name his price.
By Carol Matlack in Paris, with Tom Lowry in New York and Ronald Grover in Los Angeles
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