And Then There Were Five - Multichannel

And Then There Were Five

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Vivendi Universal S.A. pared the field of bidders for its Vivendi Universal Entertainment assets to five last week, eliminating one bidder and asking the others to come back with better offers.

According to sources, Vivendi rejected one bidder — oil billionaire Marvin Davis, who essentially put the assets in play back in November with a $20 billion offer (including the assumption of $5 billion in debt) — calling his latest bid too low. According to published reports, Davis could come back into the fray with a better offer, but a source close to Vivendi said that was unlikely.

Prize cable nets

"Anybody could come back into the ring at the right price," said the source close to Vivendi. "I wouldn't completely rule him [Davis] out, but Vivendi won't negotiate with him unless he comes back with something much more palatable."

The deadline for bids on the VUE assets — consisting of cable channels USA Network, Sci-Fi Channel, Trio and NewsWorld International; the Universal movie studio and theme parks — was June 23. On July 1, Vivendi's board of directors reviewed the bids during a regularly scheduled meeting in Paris.

There had been some questions as to whether Davis would be able to come up with the money — his bid relied heavily on financing from two private equity firms (Bain Capital and Texas Pacific Partners), which are traditionally skittish about paying high prices for assets.

Novice factor

According to one source, Davis's relative inexperience in the media business, compared to the other bidders — he owned 20th Century-Fox Film Corp. for three years in the early 1980s — played a role in his rejection.

"Everybody else has experience in media, he [Davis] doesn't," said the source close to Vivendi. "Vivendi is looking at this as a value proposition rather than a price proposition."

That leaves five remaining bidders: Liberty Media Corp., Metro-Goldwyn Mayer Inc., General Electric Co.'s NBC television unit, Viacom Inc. and a group led by former Vivendi vice chairman Edgar Bronfman Jr.

According to published reports, Vivendi has told the bidders to come back to the table in mid-July with revised offers. In addition, Vivendi has told the bidders that the Universal Music Group is no longer on the table.

According to the source close to Vivendi, UMG never was for sale, although at least three bidders included the asset in their offers — Liberty, Bronfman and Davis. The source said Vivendi believes that by waiting, it can attract a better price for UMG, especially after piracy issues in the music-publishing business are resolved.

But it was Liberty's separate bid for UMG that initially had some observers believing it was the front-runner. With UMG now off limits, it appears that the bidders are back to square one.

"I think you are going to see a fair amount of flux in this process," said Janco Partners cable analyst Matt Harrigan.

The music group was thought to be especially attractive to Bronfman, an amateur musician and songwriter. But according to a spokesman for Bronfman, the former Seagram Co. head will abide by Vivendi's wishes.

"We strongly believe these assets belong together," said Bronfman spokesman Todd Hullin. "However, we are going to go forward and bid as Vivendi has requested and proposed, which is a bid without UMG being a part of it."

Hullin said that Bronfman and his group is in the process of putting together meetings with Vivendi officials this week.

"Until we emerge from those meetings, I don't think we will have any specifics," Hullin said. He declined to reveal what Bronfman bid for the assets.

Vivendi declined to comment on specific bids. It issued a statement after a regularly scheduled meeting of its board of directors in Paris last Tuesday, which said the bidding "process is moving at sustained pace and a very significant competition has arisen," adding that "in-depth negotiations will now be pursued with selected bidders."

MGM buyback

Hullin confirmed that Bronfman has teamed with Cablevision Systems Corp. on its bid. The Bethpage, N.Y.-based MSO is contributing its Rainbow Media Holdings national programming assets — AMC, the Independent Film Channel and WE: Women's Entertainment.

"We think that gives us a unique position as we go forward with just the VUE assets," Hullin said. "The Cablevision cable networks marry up very nicely with the Universal assets. Their cable networks have a lot of library product — both television and film — and the Universal library has a lot of film and television product. We think that works very well. Basically doubling the size of the cable-network business for the new entity creates a higher critical mass and better capacity to deal with distributors. We think from a strategic point of view, we are in an advantaged position."

Bronfman's other backers include private equity groups Blackstone Group, Thomas H. Lee Partners, Wachovia and Merrill Lynch.

MGM also may have raised its chances a notch, after landing a deal to sell off its 20% stake in AMC, IFC and WE to Cablevision for $500 million in cash. That additional cash was expected to go toward a VUE bid.

MGM purchased the 20% interest in the three networks, plus Cablevision's Bravo channel, in 2001 for $825 million. MGM received $250 million for its interest in Bravo when Cablevision sold that network to NBC last year.

But even with the Bravo sale is factored in, MGM sold its interest for $75 million less than it paid for it. And it took that lower price after the networks had increased in value.

According to UBS Warburg cable debt and equity analyst Aryeh Bourkoff, the sale works out to be about $18 per subscriber, or 15.6 times estimated cash flow, nearly half the average valuations of $30 per subscriber (26 times cash flow) for recent programming deals.

While most analysts said the deal was a better move for Cablevision — it gets 100% control of the networks for a bargain price — it does pump some needed cash into MGM's arsenal from a stake that brought it little benefit.

MGM had originally invested in the networks, believing it would eventually be an inroad to an outright purchase of at least one of the properties. When that didn't happen, MGM basically decided to cut its losses and focus on its VUE bid.

According to several published reports, MGM bid $11.2 billion for the VUE assets.

But a source close to Vivendi said that was not correct. The source added that reports that Vivendi had set a floor of $11.5 billion on the bidding were also incorrect.

That leaves NBC and Viacom. Although neither submitted a formal bid — both submitted letters expressing interest mainly in the cable channels and TV production studio — they are still considered to be strong contenders. Though NBC has reportedly not offered any cash — only GE stock — its offering could be attractive if Vivendi is able to monetize those GE shares quickly.

Viacom's chances could be increased if it partnered with one of the other bidders, or possibly InterActiveCorp (formerly USA Interactive) chief Barry Diller, for the studio and theme park assets. VUE was formed in 2001 after Diller sold the remaining interest in his USA Networks cable properties that Vivendi didn't already own for $11 billion.

Lately, however, Diller and Vivendi have been at odds, after then-USA Interactive sued Vivendi claiming it was owed more than $620 million in tax payments.

"If Diller negotiates properly and there are negotiations regarding his demands from the sale of the USA Networks properties, it's always a possibility," the source close to Vivendi said.

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