The Dark Horse in the Vivendi Race


By Ron Grover These days, it seems everyone is counting out Marvin Davis' bid to buy Vivendi Universal's U.S. Entertainment assets. The one-time Denver oilman has put together a group willing to pay nearly $20 billion to buy majority stake in Universal's film studio, studio tour, and music business. But Davis gets no respect. Many whisper that he's a "tire kicker," pointing to his look-sees at such past buying opportunities as United Airlines (UAL), Northwest Airlines (NWAC), and Hilton Hotels (HLT). Heck, Barry Diller, considered the front-runner in this race, even told a conference recently that the waiter serving them lunch was more likely to buy Vivendi (V) than Marvin Davis.

I still have my doubts that Marvin & Crew will win Vivendi, but it's looking more like a horse race than people realize. And maybe, just maybe, Paris and Denver will make a deal. Perhaps Davis, who owned the 20th Century Fox studio back in the early '80s, will return to Hollywood for an encore performance.

BIG BACKERS. For starters, his bid makes tremendous sense. Davis is the only bidder out there who wants to swallow the whole enchilada -- including the troubled music company. And his $20 billion offer isn't all that far off the mark, according to recent analysis done by Goldman Sachs's London office, which put a value on the U.S. holdings of around $19 billion.

Plus, real money seems to be behind the Davis bid, which was orchestrated by former Universal co-President Brian Mulligan. He has lined up four of the eight international banks capable of doing the deal -- including FleetBoston (FBF), Deutsche Bank (DB), and Bank of America. Davis also has a bona fide player on his team in David Bonderman, whose Texas Pacific Group is in for several billion dollars. Bonderman's r?um?? also includes saving Continental Airlines (CAL) from bankruptcy, and he traveled with Davis and Mulligan to Paris in late January to plead their case to the French.

This deal still has miles to go before it can be sealed. Vivendi brass has told Davis & Co. that they intend to consider other bids and might decide to sell off the company piecemeal to get a higher price. But I doubt that will happen. Vivendi can't parcel out the the company, all talk to the contrary, without paying a hefty $2 billion fee to the Bronfman family. That little nugget was written into the 2000 merger deal between Bronfman-controlled Seagram Co. and Vivendi by since-departed Vivendi Chairman Jean-Marie Messier. The requirement lasts as long as the Bronfmans are Vivendi shareholders.

Besides, Vivendi would face messy tax complications if sold ?la carte. That's why it's more than likely Vivendi will keep the entertainment unit together and look for potential buyers of the whole thing. Unfortunately, it won't find many. While MGM (MGM) may be interested, Diller has said he doesn't want the music company.

BARRY'S CUT. Then there's the whole issue of how to deal with Diller, whose USA Interactive (USAI) holds $2.5 billion in preferred shares in Vivendi Universal's entertainment unit. Diller has said he wants to be paid. The popular wisdom is that Diller can veto any deal.

I'm not sure that's true. I spent some time looking through the agreement and the closest thing I could find was a provision that said Vivendi couldn't "transfer any asset...unless at least 50% of the net proceeds of such sale...are retained" by the company. To sidestep that issue, Davis' legal team is looking at buying the holding company that controls the entertainment unit, which they figure sidesteps the whole notion by keeping Diller as a shareholder.

Diller and Vivendi Chairman Jean Marie Fourtou have been squabbling for months over how much money Diller should be paid for the $2.5 billion in preferred shares. Diller says he wants it all, but I think he'll end up getting a heck of a lot less -- maybe $750 million if he's lucky.

HIDDEN THREAD. The Diller holding is actually separated into two pieces -- the first, for $750 million, carries a 5% annual rate. The second, $1.75 billion piece, requires only that on the 20th anniversary of the deal -- and that's 2021 -- Vivendi has to repay with cash or 56.6 million shares of USAI. Those shares are valued at $1.3 billion right now. Heck, why not let it roll. As for the $750 million, maybe Diller can collect. If not, he can take the 5% annual rate. The Davis camp would consider that cheap financing. Diller isn't commenting.

Diller also has a "put" that requires Vivendi to pay him personally for the 1.5% stake that he personally owns in the joint venture that controls Vivendi Universal's U.S. entertainment assets. That would cost the buyer a mere $275 million. That's certainly doable.

The point here is that, hidden in the stitching holding together Vivendi Universal is a thread that could allow Davis to buy it. Diller may not be that big of an obstacle. And since Vivendi can't sell off the pieces without incurring a $2 billion penalty, it will likely try to find a buyer for a majority stake in the entire company, including the music unit. How many folks want the whole thing? Not many. But Marvin Davis and his very well-heeled group do. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online


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