Diller's Part in the NBC-Vivendi Deal


By Ronald Grover Barry Diller swears he's no longer an entertainment mogul. True, in 2001 he swapped his TV studio and cable networks for a pile of money and a stake in Vivendi Universal's entertainment assets. Diller, 61, now seems content with his new company, Interactive Corp. (IAC) -- a collection of profitable Web sites and the Home Shopping Network.

Don't take Web master Diller's words too much at face value, however. He still has a few entertainment-mogul moves left in him -- leveraging the cyber-assets he took in exchange for his own Hollywood holdings, for example.

In case you haven't heard, Vivendi (V) announced in early September that it will merge its Universal studio, theme parks, and cable channels with General Electric's (GE) NBC unit. Through some contortionist dealings that would do Houdini proud, Diller still has claim to some of Vivendi's assets and needs to be paid before the NBC deal can proceed.

COMPLICATED LIFE. His stake dates back to Dec. 16, 2001, when IAC (then called USA Interactive) swapped nearly $11 billion in assets to Vivendi in exchange for $1.6 billion in cash, a 5.4% stake in the joint venture that it created with Vivendi to hold all of those assets, and $2.5 billion worth of preferred shares. On top of that, Diller himself got a 1.5% stake just for being Barry -- and agreeing to take on the role of the new venture's chairman and CEO. That little perk was worth at least $275 million, according to the deal's 2002 proxy.

Here's where it all gets interesting: In the so-called "negative covenants" that accompany some of the preferred shares, Diller must give his "prior consent" before Vivendi can "merge or consolidate" or "liquidate, dissolve or wind up" the Hollywood assets.

Does that mean that Diller could kill this merger outright? Not likely at this late juncture. Even Diller concedes that point. But he could still complicate life for NBC and Vivendi. For instance, he could stop Vivendi consolidating its TV operations with NBC's, a key part of NBC's plan to garner some $400 million in savings.

Neutralizing whatever power Diller may have over the Vivendi-NBC merger agreement is, therefore, crucial to getting the deal done. And it's far more crucial for Vivendi, it seems, than for NBC, which has said from the beginning it would walk away from a pricey deal. Vivendi would have to go back to its shareholders with a failure. This is a company, mind you, that already suffered through the indignity of the Jean-Marie Messier years, when it lost billions of dollars of shareholder value by making fruitless media deals.

PALM OUTSTRETCHED. It's no accident that Vivendi Chief Operating Officer Jean-Bernard Levy fielded all the questions concerning Diller when Levy and NBC Chairman Bob Wright did their press conference announced the deal. While Wright interjected at one point that Diller, his old friend, was "very excited about the deal", Levy was more circumspect (see BW Online, 9/05/03, "Bob Wright's Post-Vivendi Schmoozathon"). "It is our responsibility" to work out the details with Diller, said the urbane Levy. "And we are sure that we have the answers to get it done."

Answers are one thing. Money is another. Under their 2001 agreement, Diller's IAC owns 5.4% of the joint venture that was set up to hold the Hollywood assets. If Vivendi's stake in the new venture is valued at $14 billion -- as it proudly proclaimed to the rising chorus of naysayers who said it was closer to $11 billion to $12 billion - that means the IAC stake is worth $756 million.

Diller is also owed another $255 million for his 1.4% stake in the venture that Vivendi magnanimously gave him to act as the venture's CEO. (Diller parceled out smaller pieces of his stake to other ICA executives, giving them a total of around $20 million.) So, even before Vivendi comes to the bargaining table, Barry's hand is out for more than $1 billion of the $14 billion that Vivendi expects to snag.

PLAYING HARDBALL. Now, the fun really begins. IAC also holds $2.5 billion in preferred shares -- $750 million of which pay no dividend but grow for 20 years at a 5% annual rate, or about $37 million the first year. The other $1.75 million pays annual dividends of 3.6% -- about $63 million annually, with another 1.4% dividend added to the face value. Both chunks of preferred shares have 20-year terms, so over time, Barry could be placing a very large piece of change in his pocket.

What's Vivendi to do? It could pay off Diller completely, giving him roughly $2 billion for his preferred shares (on top of the $1 billion they already are likely to fork out). But that would cut deeply into the $3.8 billion in cash and GE securities that Vivendi would get from its merger agreement with Diller. There are other ways out, such as taking out an "irrevocable letter of credit" -- such as a bank letter backed by government securities -- that would reduce some of the covenants at Barry's disposable.

Perhaps Vivendi is holding out hope that Diller will play nice. Not likely. Earlier this year, Interactive filed suit against Vivendi, claiming it was owed $320 million in payments that Vivendi had pledged to put into an interest-bearing account to defer some of the taxes on the Vivendi-IAC deal.

BARRY ON BOARD? So, what will it take for Diller to acquiesce to the merger? Both Diller and Victor Kaufman, his vice-chairman and closest adviser, say they want to "monetize" their company's stake in Vivendi's Hollywood holdings. Does that mean cash? Not likely. They don't like paying taxes any more than the next guy. So they will likely look for equity, possibly to have a stake in the NBC-Vivendi joint venture, or perhaps to take a chunk of the stock in NBC parent company GE that Vivendi was to receive in the transaction.

Diller may also demand a board seat in the new Vivendi-NBC merger. Under his original agreement with Vivendi, Diller is entitled to one seat on the joint-venture's board, and perhaps may claim that gives him a seat on the new company that GE and Vivendi are creating. As they say in France, sacre bleu! Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online


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