News

Messier Drops Second Shoe, Buying USA Content Assets

12/23/2001 7:00 PM Eastern

Vivendi Universal S.A. chairman Jean-Marie Messier took additional steps to address his company's U.S. content-distribution needs, buying USA
Networks Inc.'s programming assets in a cash-and-stock deal valued at about $10.3 billion.

The USA transaction, rumored for about a week before it was announced last Monday, was the second shoe dropped by Messier. It followed hard on the heels of Vivendi's $1.5 billion investment in — and programming deal with — direct-broadcast satellite provider EchoStar Communications Corp.

The USA deal creates a new programming entity, Vivendi Universal Entertainment, to be headed by USA Networks Inc. chairman Barry Diller. VUE contains Vivendi's Universal Studios, the USA Network, Sci Fi Channel and Studios USA.

Diller's USA Networks Inc. — to be renamed USA Interactive Inc.— will house interactive-commerce assets such as TicketMaster/CitySearch and Match.com, as well as Home Shopping Network. Diller remains its chairman.

Messier was able to fulfill a prophecy he made to investors at a conference three months ago: that Vivendi would one day consolidate its previous investment in USA Networks.

Messier also kept Diller on board to pitch VUE on Wall Street.

Investors reacted well, pumping Vivendi up 6.4 percent, or $2.15, to $52.10 last Monday after the deal came out. USA shares, up about 90 percent since 1998, rose 6.5 percent on the news.

The management teams remain virtually intact. Universal Studios president and chief operating officer Ron Meyer remains, as do Universal Pictures chairman Stacey Snider, Universal Studios Recreation Group chairman and CEO Tom Williams and USA Entertainment Group chairman Michael Jackson. Snider, Williams and Jackson will report to Meyer.

Meyer reports to Diller; Diller reports to Messier.

Leadership at USA's cable networks also remains intact: Doug Herzog heads USA Network, Bonnie Hammer runs Sci Fi Channel and Patrick Vien leads the company's emerging-networks division, with Trio, Newsworld International and the upcoming Crime service.

At the press conference in New York last Monday, Messier said he and Diller started the talks in November.

Diller essentially agreed to sell his television programming assets back to their original owners for three times what he paid for them. In the process, he removed the ability of a large shareholder to block major deals, and gets to run the assets he sold.

Diller bought USA Network, Sci Fi and Studios USA from Seagram Co. Ltd. — then the parent of Universal Studios — for about $4 billion in 1998.

But most of the deal currency — about $7 billion — takes the form of Vivendi's 41 percent stake in USA Networks, which had grown in value. Vivendi also will pay USA about $1.62 billion in cash, much as USA had paid $1.3 billion to Seagram in the 1998 deal. Vivendi will also buy out Liberty Media Corp.'s 21 percent stake in USA with 52 million Vivendi shares.

Liberty also will sell its 27 percent interest in Multithématiques, the French programming concern, to Vivendi for 5.2 million Vivendi shares. Liberty will end up with 3.6 percent of Vivendi, making it the company's largest individual shareholder.

Vivendi will own 93 percent of Vivendi Universal Entertainment, Diller will own 1.5 percent personally and USA Interactive will own 5.4 percent.

INTERACTIVE SPREE?

Diller remains in firm control of USA Interactive, with 10 percent equity, but about 69 percent of voting control. Liberty will own 18 percent of USA Interactive, but yields its veto power over certain large deals.

So Diller's USA Interactive could go on a shopping spree, as some analysts expect — especially since it will have about $3 billion in cash on hand after the Vivendi deal closes.

Salomon Smith Barney Inc. analyst Niraj Gupta is looking for USA Interactive to make relatively small acquisitions in the online arena at first. Its likely targets are companies like Overture Services Inc. (www.overture.com), the search engine formerly called GoTo.com, and Sabre Holding Co., which owns the online travel reservation service Travelocity.com L.P. (www.travelocity.com).

"The company is well-positioned in a certain category in the commerce area," Gupta said. "They would look for the right kind of acquisitions that are beneficial for shareholders."

USA Networks had hunted bigger Internet game in the past, most notably its attempt to buy search engine Lycos Inc. (www.lycos.com) for as much as $22 billion in 1999.

Lycos investors balked, however, having taken the position that USA wasn't offering enough of a premium at a time when portals were hot. A year later, Lycos sold out to Terra Networks S.A. for $12.5 billion.

"That would have changed the world a bit," said Diller last week of the failed Lycos deal. "I think that was a totally valid thing to do, which is to take a portal and try to turn it into a transaction model. It is, by the way, what Yahoo! [Inc.] is trying to do a couple of years later.

"I think we were early at it and right to it. If it [Lycos] had happened, this transaction would still have happened. I don't think anything that we would have done would have stopped this from happening at a point in time. I'm just happy that the point in time is sooner, rather than later."

SWORD IS LIFTED

When Diller bought USA Networks, he gave Seagram a stake in his company and veto power over big deals. That backfired when Diller attempted to buy NBC from General Electric Co. later that year, and was blocked by Seagram's then-chairman, Edgar Bronfman. (Bronfman, later vice chairman of Vivendi Universal, resigned earlier this month.)

While Diller's relationship with Vivendi, which bought Seagram last year, has been amicable, the veto sword continued to hang over him.

Now the sword is lifted, and his programming assets are teamed more closely with the increasingly powerful Vivendi.

"It is quite clear that the motivation was for the [USA programming] assets to grow in value," Diller said at the press conference.

He added: "We realized that if we didn't solve this issue, years from now people would say, 'What dopes couldn't figure out how to bring these assets together?' The entertainment assets, put together with the Vivendi Universal assets, they can operate on a real scale."

For Vivendi, the USA deal — along with the $1.5 billion investment in EchoStar it made the week before — buys distribution for its content.

While that distribution network could be bigger, Messier said the USA deal was his last, at least for a while.

"What we are presenting to you is a decisive step," Messier said. "We do not have another one in mind. 2001 has been the year for Vivendi Universal of integration and addressing which was a blatant weakness in the U.S. market — the lack of integration in the TV and movie field and the lack of access to distribution."

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