Aug 4, 2003  •  Post A Comment

In the rebounding world of mergers and acquisitions, the sale of Vivendi Universal Entertainment is an auction run amok and a classic example of how not to do a deal. Thank goodness it is not the only game in town.
While acquiring Vivendi Universal’s USA Network, Sci Fi and other assets could have a transforming impact on such potential buyers as Liberty Media Corp. and NBC, there are other critical transactions that will result from so many high-powered media players having openly declared and pursued their growth intentions.
Clearly, the industry has moved beyond just slapping together companies to create value and massively cut costs in the hopes everything will turn out OK. That’s how Vivendi got itself in the mess it’s in.
The mere thought of one VUE bidder, Edgar Bronfman Jr., and his financial backers paying anywhere near Vivendi’s $15 billion asking price for most of the assets he sold to Vivendi several years ago (he has since lost more than $8 billion of his family’s fortune on Vivendi stock) is enough to make any sane Wall Street deal-maker crazy. “No rhyme or reason there,” a high-profile investment banker told me.
MGM’s withdrawal (for now) of its all-cash $11.5 billion bid for VUE and the price tag reservations voiced by NBC and Liberty underscore the new prudence with which even well-heeled buyers are pursuing scarce, valuable assets.
If VUE sells at all now, it will likely be because NBC or Liberty merge it into a new entity, most likely in combination with their existing assets. Then a value can be assigned to the new entity and Vivendi’s likely 30 percent equity stake in it, which can be shaped to create the “perceived value” Vivendi seeks as an alternative to hard cash, well-placed sources said.
* Comcast Corp. is unlikely to cast its net over VUE this time but will be even better positioned financially next year to do some big content acquisitions and investments. For now, Comcast is in active talks with AOL Time Warner to swap its 21 percent stake in Time Warner Cable for $6 billion to $8 billion worth of cash and cable systems to fortify its own regional cable clusters. Strapped with debt and government accounting problems, AOL Time Warner can’t pay all cash, having already paid Comcast $2.1 billion. Comcast has told the company it can’t wait until AOL is free to take its cable unit public, most likely by next year.
The Bet: Comcast uses TWC proceeds to reduce its $20 billion debt and refinances to make a friendly stock and cash offer for Disney next year.
* NBC has gone further than ever in its pursuit of VUE, with the backing of corporate parent General Electric. GE is now on record as being willing to spin off and merge NBC into a larger entertainment subsidiary it would majority own and control. If the VUE deal doesn’t happen, some kind of merger or grand alliance with Liberty, MGM, Sony or DreamWorks SKG would give NBC much-needed scale. Although it could reluctantly bring $1 billion in cash to a VUE offer, sources said any cash payments and the cashing out of a 30 percent equity stake Vivendi would take in a merged entity would be gradually dispensed over time.
The Bet: Even if Vivendi cancels the auction to take VUE public, GE’s deep pockets and its GE Capital give NBC the financial clout to facilitate an alternative initial public offering. Meantime, it will seek to expand its stake in cable networks such as A&E and content entities such as Discovery.
* Liberty remains the front-running bidder for VUE, pieces of which it could keep (most likely the cable networks) or sell (most likely the studio) to MGM or to Barry Diller, in whose InterActive Corp. Liberty is a major shareholder. The major stakes that Mr. Diller, Liberty and InterActive have in Vivendi, along with nagging tax liabilities worth billions, inexorably bind their fortunes. In the meantime, Liberty will likely combine QVC (recently fully acquired for $7.8 billion) with InterActive Corp.’s HSN to create a home shopping powerhouse and acquire the 50 percent of Court TV it doesn’t own from AOL Time Warner.
The Bet: Liberty creates the media operating company it wants through several more transactions, eventually bringing longtime allies such as Mr. Diller, NBC, DreamWorks and News Corp. into the loop.
* Cablevision Systems is willing to contribute its Rainbow cable networks in exchange for a one-third stake in something bigger, which for now is a Bronfman-owned and -operated VUE. By leveraging its powerful East Coast cable systems, bundled services and upstart satellite operation, Cablevision could negotiate a deal with Liberty, NBC and others if Mr. Bronfman’s VUE bid fails.
The Bet: The controlling Dolan family eventually will sell its nascent satellite business to one of two big competitors for a song and merge its valuable cable systems with those of Time Warner Cable, taking stock (and likely some cash) in a standalone publicly traded cable giant. Getting there, however, could be a bumpy ride.
* News Corp.-controlled DirecTV is a competitive presence in every deal and to every player, given the depth and breadth of its reach once Rupert Murdoch gets regulatory approval to acquire the dominant satellite provider. It will immediately apply its marketing savvy and expanded distribution to negotiate more secure cost-effective access deals for programming.
The Bet: News Corp., DirecTV and Fox Entertainment Group have unprecedented influence with every content supplier and distributor. Fox brings its local presence and News Corp. uses its clout to create a video and data service bundle to match cable’s core offering and upset industry economics.
* MGM admittedly needs to be part of something bigger. Plans to redistribute much of its $1 billion in cash as a shareholder dividend and to have majority owner Kirk Kerkorian increase his stake from 67 percent to 73 percent are short-term boosts on the way to a long-term solution. MGM could return to the VUE fray in partnership with Liberty, NBC, Viacom, Mr. Bronfman or Mr. Diller as a place to house Universal.
The Bet: Within a year, the $3 billion independent studio is merged with or sold to a major player on the order of DreamWorks or Sony, who need scale.
* Viacom will buy TV and radio stations and cable networks in the right place for the right price. That includes making a quiet bid for AOL Time Warner’s CNN. Viacom Chairman Sumner Redstone wants those assets so badly he would pursue them the hard way: Viacom has reportedly given some thought to partnering with Mr. Redstone’s longtime nemesis, Mr. Diller, who would invest in Universal and leave Viacom the cable networks. Opportunity makes for strange bedfellows.
The Bet: Viacom just keeps betting bigger and better.