Deal Creates A New Giant

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In April, Vivendi Universal S.A. chairman Jean-René Fourtou touched off the auction for its Vivendi Universal Entertainment assets by telling shareholders at an annual meeting that Vivendi "would be deluding ourselves" if it thought it could become a lead player in U.S. television.

Five months later, Fourtou not only is a player, he's on the verge of becoming a 20% owner in what could be one of the largest entertainment conglomerates in the world: now called NBC Universal.

Last week, Vivendi signed a letter of intent to negotiate exclusively with General Electric Co.'s NBC television unit concerning VUE. The deal currently on the table would get Vivendi $3.8 billion in cash at closing — likely next year — by selling its right to receive $4 billion in GE stock over the next two years. GE also assumes $1.6 billion in VUE debt.

The rest of the $8.6-billion payout comes from Vivendi's 20% interest in the combined NBC-Universal, which consists of NBC's CNBC and MSNBC cable channels; its NBC and Telemundo broadcast networks; VUE's USA Network, Sci Fi Channel, Trio and NewsWorld International; the Universal movie studio and Universal Studios theme parks.

Together, NBC Universal would be valued at about $43 billion and generate about $13 billion in annual revenue and $3 billion in cash flow. It's to be run by GE vice chairman and NBC chairman and CEO Robert Wright.

Analyst estimate that GE is ultimately paying about $14 billion for VUE.

Most analysts believe an initial public offering for NBC Universal is in the cards over the next few years, giving Vivendi an exit path, possibly at a higher price.

Shortly after the deal was announced, Fourtou spelled out the deal's benefits to CNBC.

"It solves the problem of reduction of debt, which still we face," Fourtou told CNBC. "It brings us value, excellent value, and very good hopes up side.

"And at the same time, it creates an industry leader which is going to help us with the strong remaining businesses we shall hold in this business."

Both pleased

Should the deal survive the bargaining yet to come, it appears both sides will get what they crave.

Vivendi gets up-front cash and an interest in a larger media entity that could be potentially worth more in the future.

GE gets a movie studio — it was the last broadcast conglomerate not to have one — a television production unit and a pair of established cable channels to go with its existing properties.

It gets a crucial an ownership stake in one of its most important primetime franchises, Law and Order.

And GE can extract hundreds of millions of dollars by eliminating overlapping functions. Merrill Lynch & Co. media analyst Jessica Reif Cohen said in a report last week that $400 million to $500 million in synergies had been identified. An NBC spokeswoman put the figure at $200 million to $500 million, including sales, promotions and programming redundancies.

On CNBC last week, Wright said he expected the deal to close without a hitch.

"This is a very well-negotiated out arrangement," he said. "There's very little likelihood in my opinion that this won't close and certainly, the final agreement will be done within a month."

No Diller waves

Wright said InterActiveCorp chairman Barry Diller — who owns about 6% of Vivendi stock and was once thought to be a major obstacle to any VUE deal — seems willing to negotiate.

Diller's personal 1.5% interest in Vivendi is worth about $275 million and he will likely cash out analysts said.

More complicated is IAC's $2.5 billion in preferred stock and its claim Vivendi owes it $620 million for taxes on interest from that preferred stake.

"I think all of these things can be worked out," Wright said. Diller has "indicated to me just within the hour that he is very interested in sitting down to see that accomplished. So I would consider Barry a friend and supporter of this transaction."

Diller released this statement: "We are perfectly happy to keep our current arrangements intact and if an opportunity presents itself out of this process to improve our position, we will pursue it. However, we are presently in discussions with no one."

Vivendi vice chairman Edgar Bronfman Jr., GE's last rival bidder for VUE, also appeared to be reluctant to make waves.

Bronfman, a Vivendi board member, recused himself from board activities while he was involved in the bidding process. But some observers had worried that Bronfman, who had earlier called an NBC-VUE deal "a big mistake," would try to block the deal if he were to return to the board before the arrangement was finalized.

During a Fox News Channel interview last Thursday, Bronfman said he would return to the Vivendi board after the deal was clinched.

Almost from the start, the VUE auction was in turmoil, with bidders dropping out in a huff.

VUE had about six suitors — oil billionaire Marvin Davis, Liberty Media Corp., Metro-Goldwyn Mayer Inc., a consortium headed by former Vivendi vice chairman Edgar Bronfman Jr., Viacom Inc. and Comcast Corp.

Then, in July Vivendi told bidders it had set a minimum price of $14 billion.

Roberts: bad timing

First to bail was MGM, which had bid $11.5 billion in cash. Next came Liberty Media, which bowed out in August. Viacom, which never submitted a formal bid and was said to be interested only in the cable channels, dropped out, and then Comcast Corp. said it wouldn't be bidding.

In an interview last week, Comcast president Brian Roberts said that, in the end, the timing was bad.

"When we said in public that we weren't going to make a bid, it was not the moment and the opportunity that we felt we should participate in," Roberts said. "I'm pretty comfortable that we have a lot on our plate and we're focused on that. You can't control the timing in life.

"This was an opportunity here and now, and it was not the right one for us. We're happy for NBC and we wish them well."

Although Comcast had said it would evaluate a possible joint programming deal with Vivendi, that is no longer the case in light of the NBC deal.

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