Messier's Messy Exit

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While Vivendi Universal S.A. reels from the very public ouster of chairman Jean-Marie Messier and reports of accounting irregularities at the French media conglomerate, one Vivendi shareholder — media mogul Barry Diller — is sitting pretty.

As Vivendi wrestles with naming new management, servicing $19 billion in debt and deciding to sell or spin off its Vivendi Universal Entertainment unit, Diller — who also is chairman of VUE — is thought by many to be in the most enviable position at the company. He comes out the winner no matter what the outcome.

Diller sold his USA Networks Inc. media assets to Vivendi in December — forming Vivendi Universal Entertainment — for $10.3 billion in cash and stock. In that deal, he secured $1.5 billion in cash and a 5.5 percent stake in Vivendi for his remaining company, renamed USA Interactive.

At the time Diller was praised for the deal – he sold the remaining interests in USA's entertainment assets – the USA Networks, Sci Fi Channel and Newsworld International cable channels and the Studios USA film and television production studios – for about three times more than he paid for them.

Also, he signed a deal that lets him leave at any time, guaranteeing him $275 million in cash upon his departure.

"He certainly looks smart for doing the deal that he did," said one investment banker that asked not to be named.

Diller was unavailable for comment.

ASSET PLAY 'UNLIKELY'

According to sources in the financial community, it is unlikely that Diller would make a play for the VUE assets immediately, either through USA Interactive or another entity.

"I think he's just going to sit back and wait," said one investment banker. "I think he feels reasonably confident in his position. Whether the U.S. assets get separated out or not, the company is going to want him involved."

Diller's role will depend on how Vivendi is ultimately restructured. Straining from more than $19 billion in debt — accumulated mostly during a Messier acquisition spree — Vivendi's new management will have to address concerns about its ability to pay that debt, as well as address the freefall in its stock during the past year. Vivendi's American Depository Receipts, traded on the New York Stock Exchange, have dropped more than 60 percent since the beginning of the year.

"It's going to take a while," said the investment banker who asked not to be named. "It's going to happen in two phases — first will be addressing the liquidity and deleveraging issues, and next will be the strategic realignment."

Messier resigned last Tuesday in a very public row with Vivendi's board members, who last week apparently had enough of the flamboyant chairman. Vivendi was expected to name Messier's replacement — Jean-Rene Fourtou, the vice chairman of drug maker Aventis S.A.'s supervisory board — on July 3.

At press time, Vivendi declined comment on Messier's status, although published reports said the former chairman was still working out a compensation package with the company, estimated to be worth around $20 million.

SACRE BLEU

During the past four months, Messier has dodged a bandolier full of bullets from board members that had been seeking his ouster. Thought by the French to be too American, Messier moved his family to a posh $17.5 million Manhattan apartment in January, and started a near riot at Vivendi's Paris headquarters in April, after dismissing popular vice chairman Pierre Lescure as the head of French film and television unit Canal Plus. But he also lost credibility with Wall Street and investors with his constant waffling in making decisions.

In the past two months alone, five directors have resigned from Vivendi's board, fed up with Messier's antics. And he appeared to avoid yet another call for his ouster on June 25, receiving an unexpected vote of confidence from Vivendi's European directors after its North American board members tried to force his resignation.

But just minutes after Messier won that vote of confidence, he managed to anger those same board members after a conference call with investors.

On that call, Messier said that he expected to be chairman of Vivendi for 15 years, a statement that many European board members felt was inappropriate after months of management turmoil. When the Bronfman family — which owns 6 percent of Vivendi stock — threatened to initiate a proxy fight for Messier's removal, the rest of the board had had enough of the controversial chairman.

"He continued to demonstrate a certain amount of uncontrollability," the investment banker said.

MAD BRONFMANS

According to press reports, the Bronfman family, which sold their Seagram Ltd. media assets to Vivendi in 2000 for $34 billion in stock, have become increasingly critical of Messier as the value of their holdings has waned.

Vivendi's stock rose sharply on news that Messier had resigned, gaining 13.4 percent or $2.65 per share between June 25 and July 1. But the company lost those gains and then some on July 2, after French press reports claimed that Vivendi had some serious accounting issues.

According to reports in French newspaper Le Monde, Vivendi had improperly added $1.5 billion in net profit to its 2001 financial statement from the sale of its stake in U.K. satellite company British Sky Broadcasting Group plc. According to Le Monde, the accounting issue came to light after Vivendi placed about 400 million BSkyB shares with a financial institution for sale at a later date, but recorded the transaction as revenue before the shares were actually sold.

The way the deal was handled in Vivendi's accounts added $1.5 billion to its net profit while lowering its debt level, according to the report.

Vivendi issued a statement last week insisting that the transaction was in compliance with French and U.S. securities regulations, and that the company had consulted with both nations' regulating bodies before recording the transaction.

Adding to Vivendi's problems were moves by two credit-rating agencies — Moody's Investors Service and Standard & Poor's — to lower their ratings on Vivendi debt. Moody's reduced its ratings on some Vivendi debt to junk-bond status, while S&P lowered its ratings to one notch above junk.

S&P warned that its Vivendi rating could be significantly reduced if the company does not secure "significant refinancing within the next few weeks."

Vivendi's ADRs closed at $17.76 each on July 2, down $4.69 per share or 21 percent.

It is widely anticipated that Fourtou would move to split Vivendi's North American entertainment assets from the French parent, via either a spin-off or an outright sale. Either way, according to analysts, Diller comes out ahead.

One wild card is the Bronfman family, who had a contentious relationship with Diller when Seagram owned more than 40 percent of USA Networks. Edgar Bronfman Jr. — then the Seagram chairman — had vetoed Diller's bid to buy the NBC television network in 1998.

According to press reports, Edgar Bronfman is anxious to begin operating his former assets again, which most likely would not sit well with Diller.

"The [Bronfman] family is going to have to decide if they want to make their bet with Barry again, or if they want to have Edgar run those businesses," the investment banker said. "Barry doesn't have an angle here except for his reputation and his relationship to those businesses. It's not like he has the ability to claw back the USA assets. They're only going to include him if the Bronfmans and the board feel it's in their interest to have Barry continue to run those businesses."

SPIN-OFF SCENARIO

In a spin-off, analysts said, Diller would likely remain chairman of VUE and would continue to have free reign to operate the company. If Vivendi decides to sell off VUE — one of its top performers — Diller is at the top of the list of prospective buyers.

Just how Diller would acquire VUE, or even if he's interested, is purely speculation. But at the moment, he has the advantage because of the dearth of potential buyers for the company.

Some analysts estimate that the VUE assets are worth about $30 billion, which would be a big chunk for even the biggest media companies to swallow in the current economic climate.

While AOL Time Warner Inc., The Walt Disney Co. and Viacom Inc. are often cited as likely candidates, all are struggling with their own debt issues and falling stock prices. Also, such media giants would face intense regulatory scrutiny in any deal, because of their already large media-industry presence.

According to published reports, Messier told staff in a memo that he was against splitting the company up, and he urged his successor to keep at least the core media assets intact.

"Vivendi Universal must go on," Messier said in the memo. "Partial disposals are necessary, but the core must be preserved: a major media and communications company, the only truly global and multicultural company."

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