Diller Positioned for Vivendi Asset Bid

Mar 24, 2003  •  Post A Comment

In a major round of executive musical chairs last week, Mel Karmazin re-upped as Viacom’s chief operating officer and Barry Diller exited as CEO of Vivendi Universal Entertainment. Those two moves could lead to some big deals, including the sale of VUE assets.
Mr. Diller’s decision to resign his nonsalaried post at VUE last week was spurred by tensions with Vivendi Universal chairman and CEO Jean-Rene Fourtou over a tax dispute worth $2 billion to Mr. Diller and his USA Interactive, which are minority shareholders, and over the disposition of the entertainment assets.
Mr. Diller said he is now free to pursue any scenario he wants, including acquiring VUE outright or, more likely, joining Liberty Media Co. and DreamWorks in their pursuit of the assets primarily as an investor.
In a recent interview with TelevisionWeek, Mr. Diller said he was not interested in remaining in the daily operations of an entertainment company but would like to be a strategic individual investor under the right circumstances.
Liberty moved to increase its acquisition war chest this week by announcing an exchange of its nonvoting AOL Time Warner shares, which could yield $2 billion in proceeds that it can use to acquire VUE or Hughes Electronics’ DirecTV. Liberty ideally would like to acquire and spin off VUE, which is valued at $15 billion to $20 billion; merge it with its own assets, such as Starz Encore, and fold in DreamWorks, whose management would operate the new entertainment giant, said sources close to the situation.
“If we didn’t have the stake in VUE that we have, we would have utterly no ambitions in this area,” Mr. Diller said about whether he was severing all entertainment links and ambitions.
“It’s possible an opportunity will be presented to us. Who can tell about that? But we are part of no group. We are part of no plot, and we will see what we can see,” Mr. Diller said.
Liberty also is contemplating a move to acquire all of QVC, which it co-owns with Comcast, and merge it with USAI’s Home Shopping Network. Liberty would retain 80 percent interest in the new home shopping entity, and USAI would be a 20 percent minority shareholder, sources said.
At Viacom, the focus now shifts from the ongoing rift between Mr. Karmazin and chairman and CEO Sumner Redstone to more aggressively pursuing such strategic acquisitions as VUE.
The executives this week announced an uneasy settlement of sorts under new employment agreements that will keep Mr. Karmazin in his post through May 2006, although under much greater restraints and with fewer protections and powers.
Mr. Redstone, 79, now has more say over operational matters, can choose the members of the Viacom board, has the final word on corporate policy and strategy and has more latitude to “fire” Mr. Karmazin. While Mr. Karmazin, 59, appears to have made major concessions, the new three-year pact gives him more latitude to leave his post (although he is restricted from going to a competitor for 18 months), and still allows him to command the daily operations of a company with which he is very comfortable and closely aligned on Wall Street. Analysts and investors cheered Mr. Karmazin’s decision to stay, and the move is expected to take pressure off Viacom stock.
The two executives exchanged niceties in prepared statements but declined any immediate interviews.
During a recent interview with TelevisionWeek, Mr. Karmazin indicated an interest in using Viacom’s $3 billion annual free cash flow and pristine balance sheet to make strategic acquisitions, which could include cable networks such as CNN and Sci-Fi Channel, and more radio and TV stations. This may be one area where Mr. Karmazin and Mr. Redstone adopt different approaches, since Mr. Redstone has the Viacom board considering using some of Viacom’s cash hoard for shareholder dividends. Mr. Redstone also would be more inclined to make major acquisitions such as AOL Time Warner and Vivendi Universal Entertainment.
“We’d like to get bigger if the opportunities were available,” Mr. Karmazin said in the interview. “We certainly are positioned to be able to dramatically expand our company.”
Viacom currently is in discussions with AOL Time Warner about acquiring the 50 percent stake it doesn’t already own in Comedy Central, valued at about $1 billion. Last year, Viacom made more than $1 billion in smaller acquisitions that expanded its core businesses, in addition to buying KCAL-TV in Los Angeles for $650 million.
Sources said Viacom could attempt to acquire Sci-Fi and USA cable networks from Marvin Davis should the billionaire oilman succeed in his ongoing $20 billion bid to acquire all of VUE. Mr. Davis has expressed a willingness to sell VUE assets piecemeal. Other suitors include AOL Time Warner, General Electric’s NBC and MGM. Vivendi officials, who recently announced a record $26 billion loss for the company, are still trying to decide how to sell the VUE assets to help reduce their debts.
According to the terms of his $11 billion sale of USA entertainment assets to Vivendi 18 months ago, Mr. Diller said Vivendi Universal owes $2.5 billion in breakup and tax-related fees to USAI and him. The sale agreement restricts the piecemeal sale of VUE assets and requires that such a tax dispute be settled before any sale can occur.
Mr. Diller, 61, said it was “inappropriate” for him to continue in what always was a temporary role as CEO in light of his mounting conflicts with Vivendi officials. “It’s all right to be [CEO of VUE] when our interests are commonly aligned,” he said. “But when Vivendi is looking to sell parts, pieces or assets as speculated about, my role of CEO is inappropriate.”
Mr. Diller announced his VUE resignation the same day USAI announced it would acquire for $3 billion the stock of Expedia.com that it doesn’t own. The acquisition helps to further simplify USAI’s balance sheet and interactive asset holdings and better define it as an operating company, rather than what some consider a portfolio of e-commerce investments.
In his TelevisionWeek interview, Mr. Diller reiterated his commitment to USAI and interactive businesses dependent on electronic transactions and not advertising, even over his life-long love of entertainment, if it comes to that.
And during an during an earnings call last week with analysts and investors, Mr. Diller said, “These interactive businesses have huge growth ahead of them. There is nothing standing in their way.”