Vivendi’s satellite strategy

Dec 17, 2001  •  Post A Comment

Vivendi Universal’s new $1.5 billion cash stake in EchoStar Communications gives the French media giant the U.S. content and technology distribution it has sought, although it could alter or spoil a $12 billion deal being negotiated with Barry Diller’s USA Networks.
In announcing a broad-based, eight-year nonexclusive strategic equity partnership with EchoStar, Vivendi Universal Chairman Jean-Marie Messier cast new doubt on the outcome of an intensely negotiated complex deal with Mr. Diller that would merge the TV and film assets of Vivendi and USA into a new entity that would be controlled by Vivendi but managed by Mr. Diller.
Mr. Diller could not be reached for comment, and those close to him said Friday it was unclear even to them whether his talks with Vivendi had hit a snag, or if the two sides were merely taking a breather from the intense limelight that had shone on the negotiations. However, bets were still on that a Vivendi-USA deal would be announced as early as this week.
“As a whole, this [EchoStar] partnership covers all the fields of activity for Vivendi Universal and very well addresses our approach to the U.S. distribution market,” Mr. Messier said. “This partnership would further increase [the] attractiveness of agreements with USA Networks [if relations with USA Networks remains as is],” he said.
In fact, some of the remarks made to industry analysts and journalists Friday left the impression that Vivendi’s EchoStar play, which had been in the works simultaneously with the USA talks, is a pre-emptive strike against Mr. Diller, who drives a tough deal and can be a demanding executive to work for and with.
“These discussions [with USA] are ongoing. They may or may not lead to an agreement,” said Mr. Messier, who added that he would be reviewing the status of the negotiations with Vivendi’s board late Friday. “Let’s see first if those negotiations are leading-or not-to an agreement. Then we will deal with the personal questions regarding Barry’s role.”
People close to the talks said a number of titles and management role configurations for Mr. Diller had been discussed.
Mr. Messier, who will join EchoStar’s board, also appeared to be tending to the delicate egos of well-regarded Universal Pictures executives who are uneasy about having a new boss. “There is an outstanding team at the head of Universal Studios led by [Chairman] Ron Meyer and [Universal Pictures Chairman] Stacy Snider. They did succeed in turning around Universal Studios, and they are the key driver. Their commitment, [just] as Barry’s commitment, would be absolutely key for the future,” Mr. Messier said.
The EchoStar agreement ensures Vivendi Universal domestic satellite carriage and performance guarantees on branded film, music and game channels the latter is creating, in addition to integrating Vivendi’s interactive Media Highway technology in EchoStar’s advanced digital set-top boxes (which are being added at about the rate of 4 million annually for a combined EchoStar-DirecTV). Vivendi also will be involved in video-on-demand and other new digital services and will widely share in license fees, subscriber fees and advertiser revenues on all platforms.
While Mr. Messier, a former investment banker, left open the door for more majority equity investments in other major distribution companies, he said Vivendi would largely rely on conventional carriage agreements with cable operators. Vivendi will not make any other such equity investments in the United States, he said.
Vivendi has been cashing out its 23 percent stake in U.K.-based BSkyB to access funds for use in the EchoStar and possibly USA transactions. But Vivendi still needs to continue its interactive content distribution pacts with BSkyB and other foreign distributors.
Before the EchoStar announcement, the Vivendi-USA deal appeared imminent, despite complications over how Mr. Diller could be ensured the managing autonomy he requires while answering to Mr. Messier as the head of a combined $20 billion TV and film production and distribution powerhouse.
On the other hand, Mr. Diller also would remain chairman and CEO of his publicly traded interactive operations, which include HSN and Ticketmaster, under what could be the changed name of USA Interactive.
A transaction with Vivendi would give Mr. Diller the long-sought-after personal wealth and freedom to acquire such interactive companies as Yahoo!, eBay or Amazon.com, sources said.
People close to Mr. Diller, who proved himself to be a content wizard during his tenures at Fox and Paramount, said while he would like to remain connected to the television and film assets he has grown (which include USA Network, the Sci-Fi Channel and Studios USA), his true passion is developing an unprecedented global interactive platform.
French-based Vivendi Universal could pay USA as much as $12 billion, the majority of which would be used by Mr. Diller to buy back Vivendi’s 41 percent stake in USA Networks. Mr. Diller could be given a continuing interest in the new combined TV and film entity.
Ironically, Mr. Messier will be reacquiring the TV and film assets Mr. Diller bought for $4 billion in 1998 from then-Universal chief Edgar Bronfman Jr., who resigned as Vivendi Universal vice chair earlier this month.
With Mr. Diller in an unusual dual role at the helm of Vivendi Universal’s combined TV and film assets, the French entertainment conglomerate would aggressively pursue other major distribution companies that could include NBC, Sony Corp. of America or MGM. The heads of NBC, which is on an acquisition binge, and Sony said they are not for sale.

Vivendi Universal recently announced the formation of a Los Angeles-based Net USA Group, uniting its online music, games, education and entertainment operations that will be major contributors of interactive content under the EchoStar pact.
Vivendi would have an 11 percent stake in EchoStar but less than a 5 percent stake in a combined EchoStar-DirecTV, which would provide a dominant domestic satellite base of 15 million households.
For his part, EchoStar Chairman Charlie Ergen, who has kept a low profile since announcing his acquisition of DirecTV more than a month ago, said the $1.5 billion in cash along with a $700 million high-yield offering and about $3 billion in bank debt will pay off a $5.1 billion bridge loan EchoStar secured to announce the DirecTV deal. EchoStar will issue new shares to Vivendi for about $26 each.
In a separate but related transaction, John Malone’s Liberty Media Group could pick up some of the 23 percent stake in BSkyB that Vivendi is unloading to become an even bigger shareholder in that international satellite entity.