Analysis: Diller Shuns Knightly Role

Feb 23, 2004  •  Post A Comment

Despite mounting speculation on Wall Street that Barry Diller and John Malone will counter Comcast Corp.’s hostile pursuit of The Walt Disney Co. as white knights for longtime friend and embattled Disney Chairman Michael Eisner, so far both moguls are remaining mum.
In an interview with TelevisionWeek shortly before Comcast made its bid on Feb. 10, Mr. Diller insisted that he has no interest in a return to traditional media. “I have no intention of going back,” said Mr. Diller, who reiterated his commitment to InterActiveCorp and its interactive interests.
“This is where my interests lie. These are the kinds of possibilities that excite me. This is where I am concentrating most of my time and effort,” Mr. Diller said, referring to the Internet and how IAC’s interactive businesses compare with traditional media companies such as Universal, USA, Fox and ABC, where Mr. Diller made his reputation and fortune.
“How can anyone compare the two? One is a place where businesses are born; the other where they keep being tested. This is a far more interesting place to be,” he said.
Mr. Diller, who has not spoken to the press since the Comcast bid, declined requests to update the interview based on recent events as rumors swirl that he is playing a behind-the-scenes role as an adviser to Mr. Eisner.
Despite the denials, there continues to be widespread speculation that at some point Mr. Diller might assist with or be part of a counterbid for Disney or a defensive move. Such moves could include acquisitions of companies such as Metro-Goldwyn-Mayer or a key TV station such as KRON-TV in San Francisco, which would increase Disney’s $12 billion debt. Disney also could seek alignment with a friendly media giant or private equity investors.
However, Disney’s financial advisers late last week ruled out a friendly merger with a “white knight” for now, insisting that Disney could fend off a takeover based on its own strengthening balance sheet. Still, Disney last week consummated its long-running negotiation to acquire The Jim Henson Co. for an undisclosed price, believed to be less than $200 million.
Any move by Mr. Diller and Mr. Malone, whose Liberty Media Corp. is IAC’s largest shareholder, to help Disney could come before the second round of bidding for Disney gets under way, perhaps by Disney’s annual shareholders meeting March 3, sources said.
It might make perfect sense if Liberty didn’t have a nearly 10 percent voting interest in Rupert Murdoch’s News Corp., which many investors believe is well-positioned to eventually absorb all or part of Liberty’s diverse portfolio of assets and investments.
Also, Mr. Diller has spent the year since he resigned as VUE chairman expanding and simplifying his portfolio of Internet-related companies (including Ticketmaster, Expedia and Lending Tree) as chairman and CEO of InterActiveCorp, which claims Liberty as its largest shareholder. IAC is on its way to becoming the world’s largest consumer e-commerce business in travel, personal finance, local entertainment and even the dating game. Any move away from that stance would surely draw the ire of IAC shareholders and financial backers, sources close to the company said.
But that doesn’t keep Mr. Diller’s name from showing up on a short list of industry powerbrokers who could influence what is sure to be the ongoing tug-of-war between Comcast and Disney.
It certainly would be a way for Mr. Diller to pay back Comcast CEO Brian Roberts for snatching control of QVC years ago, a move that has been the source of friction between the two men.
Disney recently hired Martin Lipton, a veteran merger attorney and a friend of Mr. Diller, fueling more speculation that Mr. Diller’s return to the traditional media fold is afoot.
One obstacle to any deal may be the fact Mr. Diller and IAC remain major shareholders in Vivendi Universal, whose U.S. assets are in the process of being acquired by NBC.
Any interest Mr. Diller has in coming to the rescue of Disney and Mr. Eisner, with whom he once worked at ABC and Paramount Pictures, could make it necessary for IAC and Mr. Diller to sever their complex ties and settle their lawsuit with Vivendi-a task that is proving nearly impossible to accomplish.
“We’re talking about trying to pull apart an ownership agreement Diller made when he sold USA Networks to Vivendi that was designed not be dismantled,” said an executive close to the situation.
In a recent interview with TelevisionWeek, General Electric Vice Chairman and NBC Chairman Bob Wright said he is resigned to the possibility of Mr. Diller and IAC remaining influential shareholders in the new NBC Universal, as long as Vivendi fulfills its commitment to settle all financial and legal obligations to Mr. Diller and IAC over time. That includes a lawsuit Mr. Diller has filed against Vivendi over tax-related issues and payments.
“I don’t think it would be the ideal solution and I don’t think it is the monetization of his interests that Barry eventually wants, but it would be a solution for now,” said Mr. Wright, who speaks to Mr. Diller regularly.
Sources close to the situation say GE and NBC may prefer simply to use cash rather than GE stock in the company’s VUE transaction to allow Vivendi to buy out Mr. Diller and IAC for about $2 billion, so that NBC can own VUE free and clear.
For now, Mr. Diller said he prefers to simply stay put.
“I’m not a deal maker or breaker. We have a deal. We have a very, very clearly articulated, memorialized transaction with VU and VUE. That’s it,” Mr. Diller said.
“We have no great ambition to change it. If anybody wants to change it, they can call us up and discuss it, which we are happy to do. But we’re also happy to stay where we are,” Mr. Diller said. “We don’t know what will happen.”
Even while his future role in the traditional media and entertainment worlds he has helped to transform remains unknown, Mr. Diller is juggling a new set of challenges with IAC’s Internet-related businesses.
Even in the new media space, Barry Diller faces some old, familiar problems.
For instance, in recent months, IAC has gone from being a $27 billion Wall Street darling to being taken to task by industry analysts about the wisdom of some acquisition strategies and the long-term profit picture of core businesses. It is a dilemma that vexed his USA Networks Inc., which Mr. Diller concedes he was never able to grow beyond what he called a “second-tier” entertainment player.
“We did not have the scale we needed to be a first-tier player, and contrary to popular belief, I was not driven to get it,” he said.
Within a year after selling USA’s cable networks and studio to Vivendi Universal, Mr. Diller resigned as chairman of VUE to devote all of his time to IAC. He traded a lifelong concern about program ratings for tracking the likes of online travel ticket sales and mortgage lending rates. He also assumed the controversial position of urging the adoption of new regulations to curb the power of broadcast and cable networks.
Now that the dust has settled on his interactive empire, some analysts and investors have taken to characterizing it as a “faith stock,” even though its growth is many times that of most media companies.
On the other hand, IAC is being compared by some to Berkshire Hathaway, and Mr. Diller’s vision for creating a new media world order to the genius of Berkshire Hathaway Chairman Warren Buffett, with a high target price of $47 per share and net income growing by more than a third to top $1.1 billion this year.
Even a forecast for generating $11 billion in free cash flow over the next five years hasn’t won him unconditional support on Wall Street, even though more limited acquisitions of up to $1 billion this year and a possible stock buyback are in the offing, analysts said.
“I think it takes time. We are a new player. IAC has only been in its current confirmation for about one year. It will take a long time for people to understand and to be comfortable with our business concept,” Mr. Diller said.
“We survived and actually thrived
the first time around a Kool-Aid market by staying grounded and making sound bets on real businesses, and we do not intend to lose that discipline,” he said. “It’s one reason we have de-emphasized acquisitions and we have been so focused on internal growth.”
But that new reserve will not keep IAC from responding to acquisition opportunities and “being as creative as the markets will allow,” he said. IAC still has more than $1 billion in cash and marketable securities to tap.
Despite longstanding speculation to the contrary, Mr. Diller said he has no plans to sell HSN or merge it with QVC, which is 100 percent owned by Liberty Media Corp., the largest (19 percent) stakeholder in IAC.
“I don’t think so. I do not think there is any additional value that can come from putting together HSN and QVC. We have competing services. HSN has begun to aggressively compete with QVC. It has gained share in every quarter for the last four quarters,” Mr. Diller said.
He added that he sees no way, at the moment, that Mr. Malone would seek to leverage his company’s majority stake in IAC, or provide a link between the two companies and News Corp.
Having spent close to $10 billion on targeted acquisitions in the past two years, Mr. Diller has signaled IAC may slow down its buying spree while remaining opportunistic.
“We certainly have critical mass. We have over $1 billion a year in hard earnings. So acquisitions for us have to fit a certain profile that they didn’t before,” Mr. Diller said. IAC more likely will acquire select online transactional businesses while securing stronger distribution pacts with national portal companies.