MGM Pulls Out of Race for Vivendi Media Assets

The multibillion-dollar auction for Vivendi Universal’s film, television and theme park operations was upended Tuesday when the suitor with the most cash on the table, Metro-Goldwyn-Mayer Inc., abruptly walked away, making it harder for the French conglomerate to ignite a bidding war.

MGM, controlled by casino and entertainment mogul Kirk Kerkorian, had offered to pay $11.5 billion to expand its relatively modest Hollywood holdings. But in a meeting this week, Vivendi executives said the bid was $2.5 billion too low, a potentially risky rebuff, according to some analysts and bidders.

“It doesn’t look very good for Vivendi to have one of the highest bidders drop out,” said Drew Borst, a media analyst with Sanford C. Bernstein & Co. “Vivendi wants to make this as competitive as possible. All of a sudden, it just became a little less competitive.”

Vivendi Universal declined to comment on MGM’s pullout.

The auction was launched after the financially disastrous marriage between Vivendi and Universal in 2000 saddled the company with more than $30 billion in debt and triggered a revolt among shareholders. Vivendi Chief Executive Jean-Marie Messier, architect of the merger, was ousted last year. He was replaced by a pillar of French commerce, Jean-Rene Fourtou, who announced that the once-staid utility would sell the assets of the storied studio, home to films such as “Seabiscuit,” “A Beautiful Mind” and the “Jurassic Park” blockbusters.

When the bidding officially began last month, there were six suitors interested in rounding out their varying corporate ambitions. They were MGM, Viacom Inc., General Electric Co.’s NBC, Liberty Media Corp. and two consortiums, one led by oil tycoon Marvin Davis and the other by Seagram Co. heir Edgar Bronfman Jr.

In recent weeks, however, the field has narrowed, reshaping the dynamics of the sweepstakes and calling into question whether Vivendi is asking too much.

“Unfortunately, meeting the seller’s current price expectations would not be consistent with our valuation of the assets,” MGM Chief Executive Alex Yemenidjian said Tuesday. “MGM is a disciplined buyer, and we will not pursue strategic opportunities, however attractive, unless we can do so on a basis that makes sense for our shareholders.”

For Kerkorian, Universal was one of the few opportunities that the 86-year-old billionaire would have to transform his studio into one of Hollywood’s elite. Since buying MGM for $1.3 billion in 1996, Kerkorian has been looking for ways to bulk up his entertainment operations, but acquisition opportunities the size of Universal are scarce.

With MGM gone -- and Davis and Bronfman not considered front-runners -- the smart money is riding on two competitors that seem willing to battle it out -- Liberty Media and NBC -- both of which are savvy bidders.

But if Vivendi is worried about a narrowing field of suitors, it’s not showing it. The company is confident it holds a stronger hand than when the bidding began because it has substantially slashed and refinanced its debt.

The company has resisted demands for exclusive negotiations, spurned offers it deemed too low and even established the groundwork for a possible public offering of the Universal group early next year if the bids comes up short.

“The sword that was hanging over them a few months ago, in terms of their liquidity situation, isn’t quite as horrific as it was,” said Matthew Harrigan, senior research analyst at Janco Partners Inc., an investment banking firm near Denver.

Andrew Rittenberry, an analyst with New York-based Gabelli & Co., said Vivendi’s asking price was not unreasonable. Many analysts have valued the assets up for grabs at $14 billion to $15 billion.

“I think they’re doing the right thing for shareholders,” Rittenberry said.

Some of the bidders, including MGM, have expressed dismay not only about the money but also the process. Several auction participants have complained about receiving too little financial information from Vivendi, as well as conflicting signals over what price the company was seeking for the group and how soon it wanted to do a deal, and even what menu of assets it wanted to sell.

“We’ve thrown these guys into the Super Bowl, and they’re not ready to play small town college football,” said one frustrated source close to the auction.

In an interview Tuesday before MGM’s announcement, Vivendi Chief Operating Officer Jean-Bernard Levy dismissed the widespread perception that the company was losing control of the much-watched auction of the Universal movie studio, theme parks and television businesses. He also played down the complaints, saying such frustrations are normal in auctions and the company has been in regular communication with all of the bidders.

“This is a completely mastered process,” Levy said from an office at Universal City. “Our potential partners have a clear indication about what it takes to do a deal.”

Levy said Vivendi would send a formal letter to bidders this week setting an Aug. 15 deadline for second-round bids and a price range. Levy would not comment on a minimum price, but sources close to the company have said that Vivendi was seeking about $14 billion for its share in the assets.

That asking price doesn’t include at least $1 billion that buyers would have to pay for shares owned by media mogul Barry Diller and his InterActiveCorp. Diller, as part of his shareholder agreement, has a say in any sale.

In the second round, Liberty Chairman John Malone is expected to bid mostly cash, while NBC has proposed a merger of its NBC network, Spanish-language Telemundo and cable properties (including Bravo and CNBC) with Universal’s film, TV and theme park group.

NBC is the only major network without a stand-alone studio, and Universal is the only Hollywood studio aside from Sony Pictures Entertainment that doesn’t own a broadcast network.

Another major draw for NBC is its existing ties to Universal’s TV group. One-fourth of NBC’s prime-time schedule is produced by Universal Television, including three “Law & Order” shows, which have been NBC’s most durable ratings engine.

In addition, forging a venture with NBC’s stable management team and its well-regarded parent company is attractive to Vivendi because it is considering keeping a minority stake in the entertainment assets.

According to sources close to the bidding, NBC recently sweetened its proposal by offering as much as $1 billion in cash, in addition to assuming some of Vivendi’s massive debt. That gesture was well-received by Vivendi executives, the sources said.

“NBC is looking more credible, particularly if they are now willing to put in some cash,” analyst Harrigan said.

NBC executives declined to comment on the proposal.