Malone Still Sunning for VUE

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Allen & Co.'s annual media confab in Sun Valley, Idaho, was full of bidders for Vivendi Universal S.A.'s U.S. entertainment assets last week, causing some analysts and observers to speculate that a series of new alliances could spring forth from the annual conference.

But just who might team together is still up in the air.

"You always tend to see a lot of flux at that [Allen] conference," said Janco Partners cable analyst Matt Harrigan. "It tells you what transpires when you have that genre of individual in a lot more intimate setting. I certainly wouldn't say it is outside of the realm."

Attendees of the five-day conference included Liberty Media Corp. chairman John Malone, InterActiveCorp chairman Barry Diller, Viacom Inc. chairman Sumner Redstone and former Vivendi Universal vice chairman Edgar Bronfman Jr., among others.

"This probably has more entertainment value than most of the product Hollywood puts out these days," Harrigan added.

Help for Malone

Liberty Media, one of five bidders for the Vivendi Universal Entertainment assets, is considered to be more likely to take on a partner now, since it agreed to pay $7.9 billion for Comcast Corp.'s 57.5% interest in cable shopping channel QVC Inc.

"If anything, Liberty might be more likely to partner with somebody now, possibly [General Electric Co.], maybe even Viacom," Harrigan said. "But the issue there is are you streamlining or introducing more complexity."

The other bidders for the Vivendi assets — which include cable channels USA Network, Sci-Fi Channel, Trio and NewsWorld International, the Universal movie studio and Universal theme parks — are GE unit NBC, Viacom, Metro-Goldwyn Mayer Inc., and a group led by Bronfman and Cablevision Systems Corp.

The first round of bidding for the VUE assets closed June 23, with oil billionaire Marvin Davis's bid rejected as too low. Although Davis could come back with a higher bid, many observers believed that to be unlikely.

The U.S. assets are likely to fetch prices close to $15 billion, according to reports. Vivendi is expected to choose a winner in September.

Liberty, at first thought to have the inside track in the bidding, slipped a bit after it announced the QVC deal. But most analysts believe that Liberty can swallow both QVC and Vivendi, given the flexible structure of the QVC purchase.

But adding to the difficulties for Liberty was Moody's Investors Service's decision to place Liberty debt on review for a possible downgrade.

According to a statement, Moody's is concerned that the QVC deal, coupled with a possible VUE bid, would substantially increase Liberty's debt load. Moody's estimated that Liberty would take on an extra $5 billion in debt for the QVC purchase, most likely by leveraging the shopping network's substantial cash flow.

QVC reported cash flow of $858 million in 2002, which was expected to grow to $961 million this year.

That additional leverage, coupled with Moody's belief that Liberty would continue to pursue acquisitions, prompted the review, the ratings agency said.

"Liberty's investment activity may strain certain asset coverage and liquidity metrics that have been the underpinning of its investment grade rating over the intermediate term," Moody's said in a statement.

The VUE auction process is rife with wild cards — it has been speculated that Liberty could try to partner with Hollywood studio DreamWorks SKG for the Universal film studio, naming DreamWorks head Jeffrey Katzenberg to run both properties. And then there is Diller, who holds about 56 million shares of Vivendi stock as part of the deal that helped create VUE back in 2001.

Diller has a close relationship with Malone — Liberty owns 19% of stock in InterActiveCorp, formerly USA Networks Inc. — and could surface as a partner in some deal.

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

Still, any deal for VUE will likely have to have Diller's blessing.

"Diller, I'm sure, feels he has a card to play," Harrigan said.

Natexis Bleichroeder Inc. analyst Robert Routh agreed that Diller will be a factor.

"Anything that happens, he [Diller] is going to have an equity position, so does it really matter if he's a direct bidder or not?" Routh said. "Any way you look at it, he will be involved — he owns 1.5% of VUE directly, VUE is held partially within his InterActiveCorp, and he holds the preferred [class] A and B [shares].

"It doesn't really matter who gets it [VUE], Diller is going to be there in some way, shape or form. The question is how long and in what capacity?"

For the moment, Liberty is continuing on its own.

Last Thursday, Reuters reported that the Denver media giant was not talking to Diller at this point in the VUE bidding.

"We have a nondisclosure [agreement] that precludes us from talking to Barry about this situation," Malone told Reuters at the Sun Valley conference. Malone added that Liberty is moving forward in the VUE auction.

"We continue to talk to them, and we are interested," Malone told Reuters.

Routh said he didn't expect any alliances to be formed at the Allen conference or anywhere else. If new partnerships do spring up, he added, they will likely consist of the several private-equity groups that were backing the original six bidders.

"MGM doesn't need anybody, Liberty doesn't need anybody and we've already seen the Bronfman-Cablevision alliance being formed," Routh said.

Three leaders?

Routh said he considered MGM, Liberty and GE to be the front-runners, adding that he believed that MGM makes the most sense.

"MGM can afford to pay a higher bid than most others because of the synergies that would be created in a combined MGM-Universal," Routh said.

Those synergies, he added, include combining theatrical and home-video distribution, combining production costs, reducing production budgets and reducing duplicative overhead.

"MGM has that ability, Routh said. "You can justify on a pro forma basis that they could afford to pay a couple of hundred million [dollars] more than anyone else, because they can realize multiples of that in cost savings that others will not realize."

Although some published reports have said that bidding for VUE could reach as high as $15 billion, Routh said that is much too high a price.

Routh values Vivendi's 86% interest in VUE at $11.4 billion, and the entire operation at $13.2 billion.

"I do not think that anyone is going to pay $15 billion," Routh said. "The highest they are going to get is maybe $12 billion."

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