Diller and Malone's Vivendi Waltz


By Ron Grover When it comes to shuffling assets for big dollars, no one does it better than Barry Diller and John Malone. And when they team up, as they occasionally do, watch out. The two joined forces late last year to sell off parts of USA Interactive (USAI), in which they both own large stakes. The pieces they sold were the USA and Sci-Fi cable channels and the TV studio that produces, among other things, Law and Order and its offspring.

Former Vivendi (V) Chairman Jean-Marie Messier was the buyer for those assets, paying $11.6 billion. The deal-loving Frenchman lumped his new purchases together with Vivendi's Universal Studios and voila! -- he created Vivendi Universal Entertainment (VUE), a film, TV, and theme-park unit. Vivendi owns 93.06% of VUE, USA Interactive has 5.44%, and Diller himself holds 1.5%.

At first glance, it sure looks like the U.S. duo got the better of Messier, who was eventually crushed by debt -- brought on by too much dealmaking -- and resigned from Vivendi in July. But let's take a harder look. Malone and Diller walked off with more paper than cash in the deal. Last time I checked, the value of the stock that their companies held in Vivendi had fallen by $1 billion since the deal closed in May. And that doesn't even take into account the $2.5 billion in Class A and Class B preferred shares in VUE that Diller's USA Interactive is owed.

CONVOLUTED CONTRACTS. If Vivendi is forced into bankruptcy -- not altogether unlikely as it's struggling with $19 billion in debt -- Diller and Malone could find themselves in the unfamiliar position of holding a very empty bag. With so much at stake, it's no surprise that they're trying hard to figure a way to buy VUE. "The idea is to put it in safe hands, namely their own," says one Diller associate.

As in all deals involving Malone and Diller, how they arrived at their Vivendi holdings is complicated. For starters, Malone's Liberty Media owned 20% of Diller's USA Interactive. As part of a complex management contract Malone has with Diller for the latter to run USA Interactive, Malone needed to keep his stake in USAI at 20% even after the Vivendi deal. So part of the deal had him selling 25 million USAI shares to Vivendi, along with a stake that Liberty owned in French pay-channel MultiThematiques. In return, Malone received 37.4 million shares in Vivendi Universal, VUE's French parent company. At the time the deal closed, those shares were worth $1 billion. Today, with Vivendi stock in a funk, they're worth $500 million.

The deal was just as convoluted when it came to Diller and USA Interactive. In return for the assets that Vivendi bought, USAI got $1.62 billion in cash and a 5.44% stake in VUE. USAI also holds some $2.5 billion in preferred shares. At the time of the deal, Diller's company estimated that the 5.44% stake was worth $1 billion. It has since shrunk to $500 million or so, as VUE's value has tracked its decline.

VIVENDI ON ICE? More important to Diller, though, is that those preferred VUE shares are supposed to throw off some $160 million in dividends annually. If VUE can't pay, then parent Vivendi Universal is on the hook for the $160 million. The problem is that no one knows what will become of VUE or its parent, and whether either of them will still be in a position to pony up the $160 million.

That's a legitimate concern, given that Vivendi is staggering under $19 billion in debt, $5 billion of which is due in March. That puts one-time French pharmaceutical company executive Jean-Rene Fourtou, who took over from Messier in July, in a tough spot. He has already put Vivendi's books unit on the market, and may do the same for its telecommunications holdings.

Fourtou hasn't yet decided what he'll do with Vivendi's entertainment assets, which also include the Universal music group. He's expected to meet with music group chief Doug Morris in New York on Sept. 12 and in Los Angeles with Diller and studio chief Ron Meyer on Sept. 13. Following Fourtou's fact-finding mission, Vivendi's board will meet on Sept. 25 to determine the company's strategy.

HARD BARGAINS. For weeks now, Diller and Malone have been quietly plotting their next move. The deal they most want to do, according to sources in both camps, is one in which their two companies control at least 50% of VUE's film and TV production operations and the cable channels. As now envisioned, Vivendi would end up owning the rest of VUE, which it might sell to the public in the next year or so.

From Malone's and Diller's viewpoint, such a deal makes great sense. Malone, who values content and whose Liberty Media has been taking stakes in cable channels, would get a large library of movies, including E.T., The Mummy, and The Fast and the Furious. Diller would once more have access to cable channels, which are great ways to promote events, travel, and all manner of things USAI sells through its TicketMaster, Expedia.com, and other holdings.

The question is whether Fourtou will bite. No doubt, even in Paris they know about Diller and Malone, who have a penchant for taking folks to the cleaners. Just ask Mike Armstrong, the AT&T (T) CEO who bought a broken-down Tele-Communications Inc. cable system from Malone. Armstrong's company has been swimming in debt ever since. Or ask Messier -- wherever he is right now. The $11.6 billion he paid for Diller's cable and TV operation is roughly twice what others figured it was worth.

HIGHER BIDS? At the very least, Fourtou won't rush to embrace a deal with Malone and Diller until he has looked at it long and hard. Vivendi has floated the notion of an initial public offering of VUE, or it may look for a buyer to take a minority piece. Then again, it might find a buyer willing to pay more than Malone and Diller are offering.

Diller desperately wants VUE to end up in secure hands, even if they aren't his, there are many possibilities. NBC executives had one meeting with Fourtou. Both Viacom (VIA) and News Corp. (NWS) have expressed interest in buying the cable channels, but neither necessarily wants the entire entertainment operation.

And while Fourtou clearly doesn't want bankruptcy, that always remains an option -- perhaps through a "prepackaged" bankruptcy that eliminates some debt and also wipes out shareholders like Malone and Diller. Vivendi executives have no comment, pending the Sept. 25 board meeting, while Diller and Malone both declined to comment as well.

"INTO THE SUNSET"? So what about these two in the meantime? Malone has his hands full with his varied, far-flung media operations. Diller continues to run USA Interactive. And under a quirky side deal he made with Messier, he also heads VUE, spending about one-third of his time on it. Diller doesn't draw a salary for running VUE, other than the 1.5% stake that has a minimum guaranteed value of $275 million. And he has mostly kept a low profile anyway, allowing studio chiefs Ron Meyer and Stacy Snider to continue to make and market the movies.

In fact, associates say Diller would just as soon take his money and go back to running USAI full-time. His stock in that company, which owns such enterprises as the Home Shopping Network and online dating service Match.com, is valued at close to $2 billion. "For the right deal, he would take his money and ride into the sunset," says a close Diller associate.

Even so, Diller has to make sure that USA's piece of the Vivendi world is well cared for. He's watching Fourtou very carefully. The French CEO has said he wants to sell off as much as $10 billion in assets. To that end, he has already put Vivendi's publishing assets on the market, including the U.S. company Houghton Mifflin. He wants about $5 billion but is getting bids closer to $3.5 billion. Eventually, he may have to peddle Vivendi's 44% stake in French phone company Cegetel, which could bring $8 billion or so. But neither deal is a sure thing.

So Diller and Malone keep plotting, hoping to cobble together some kind of strategy for getting the the prime parts of VUE. Where's the deal-loving Jean-Marie Messier when they really need him? Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online


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