Vivendi Universal S.A. chairman Jean-Marie Messier finally got a U.S. distribution beachhead when he agreed last week to invest $1.5 billion in EchoStar Communications Corp. under an eight-year deal to develop programming for the direct-broadcast satellite provider.
"This is our strategy looking to the U.S. distribution market, not to own or control cable or satellite operations," Messier said in a conference call with reporters after announcing the deal last Friday.
Vivendi's investment will give it a 10 percent stake in EchoStar, whose $28 billion acquisition of Hughes Electronic Corp. — parent of DBS rival DirecTV Inc. — is currently undergoing regulatory review.
At the same time, Vivendi is negotiating with USA Networks Inc. to acquire three prize programming assets — USA Network, Sci Fi Channel and Studios USA — in exchange for relinquishing its 41 percent stake in USA Networks and cash.
Messier said discussions with USA were ongoing, but repeated statements from earlier last week that there was no guarantee a deal would get done. He acknowledged that a board meeting was scheduled for last Friday, but said it was "normal to convene the board to overview the status of negotiations."
"In due time, when a decision is ready, the board will meet and make a decision," he added.
Last Tuesday, following a report in the New York Post, Vivendi acknowledged it has talked with USA Networks about a possible transaction, but said the reported price tag — $13 billion to $18 billion — was off base.
Seagram Co. Ltd., which sold out to Vivendi in 2000, had merged the USA content assets into Diller's company, then called HSN Inc., two years earlier. So Vivendi would essentially be buying back those assets.
Vivendi already owns about 41 percent of Barry Diller's USA Networks, but Diller controls the company, so Messier must buy him out or otherwise accommodate his interests.
Any deal also would need to pass muster with John Malone's Liberty Media Corp., which owns about 21 percent of USA and has veto power over certain big transactions.
Last Friday, Messier was more interested in talking up the EchoStar deal, which he said satisfies Vivendi's U.S. distribution desires.
"This alliance fulfills our desire to have one strong, close partner in the United States," Messier said. "As far as making an equity investment in a minority position in a distributor, this is going to be the one in the U.S. market. We do not intend to have any other minority investment."
SPACE FOR FIVE NETS
Terms of the deal call for Vivendi to develop five channels of basic and niche programming, such as action, suspense, music, youth-oriented content and interactive gaming channels.
One of those channels will be placed on EchoStar's "America's Top 100" programming package, and two will be located on its broader "America's Top 150" tier.
Vivendi also will offer expanded pay-per-view and video-on-demand movies from current Universal Studios releases, as well as certain library films and events. These services are expected to begin in the fall of 2002.
Messier said the original programming deal was not exclusive, and Vivendi intends to offer the networks to cable operators as well.
While downplaying any need to win control of the USA assets, he conceded there were obvious synergies. "Obviously, this partnership's function increases the attractiveness of an agreement with USA Networks," Messier said.
If Messier does come to terms with Diller, EchoStar could provide additional carriage for the USA programming holdings NewsWorld International and Trio, which are available to DirecTV subscribers but aren't on Dish.
USA has at least two new networks in the works — Crime Channel and an interactive travel channel — that could also find their way to EchoStar subscribers.
Messier said he had no plans to buy more of EchoStar in the future. "This is a one-shot investment with a major U.S. distributor," he said.
Messier also gets a seat on EchoStar's board. If the Hughes acquisition is completed, Vivendi would have 5 percent of the combined entity's equity.
Vivendi said it would pay in cash: it raised $1.5 billion last week by selling a portion of its stake in British Sky Broadcasting, the United Kingdom DBS provider.
ERGEN NEEDS CASH
Vivendi already has strong distribution in Europe, through Canal Plus, and has wanted a U.S. vehicle for its film, television and music content ever since purchasing Universal Studio parent Seagram Co. Ltd. last year.
The deal gives EchoStar some cash for the Hughes deal and could enhance its interactive-television strategy. EchoStar chairman Charlie Ergen engineered a $5.5 billion short-term bridge loan to help seal the DirecTV deal. EchoStar also said Friday that it would float a $700 million bond offering.
"This puts us on sound financial footing in light of the pending merger," Ergen said of the Vivendi deal.
EchoStar also agreed to deploy Vivendi's MediaHighway middleware technology on advanced set-tops, which would allow Dish customers with personal video recorders to download movies and music from Vivendi's Universal Studios or its Universal Music Group.
EchoStar already has a middleware agreement with OpenTV Inc., and Ergen said that relationship would continue. Initially, both platforms will be available on advanced set-tops, he said.
Ergen said EchoStar normally deploys between 4 million and 5 million new set-tops annually. "We expect that by the time we deploy [MediaHighway], about 50 percent of new homes will be deploying that technology," Ergen said.