A Deal of Attention for Diller

Barry Diller’s surprise deal to control most of Universal Studios’ television business continues to be a provocative topic in Hollywood.

The decision by Seagram chief Edgar Bronfman Jr. to sell Universal’s USA Network, Sci-Fi Network and its domestic TV production and distribution business to Diller’s HSN Inc. in a deal valued at $4.1 billion is widely viewed as a smart, if highly perplexing, move.

After the transaction is completed early next year, Universal would be the only major studio to have turned over control of one of its key operating businesses, touching a sensitive nerve in Hollywood. The soaring cost and increasing risks of making films and TV programs is forcing every studio to reassess the traditional models for doing business.

But many viewed Seagram’s action as a drastic remedy--a bet by Bronfman that $1.2 billion in cash and a 45% stake in Diller’s growing hodgepodge of assets in TV broadcasting, electronic retailing and cable programming will be worth more in the future than 100% of Universal’s TV operations would be.

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While many sources were quick to suggest that Diller had picked Bronfman’s pocket, others have since concluded that the deal could work just as well for the Canadian beverage scion. It allows Seagram, which is under pressure to justify its huge investment in Hollywood, to minimize its risks in entertainment by keeping off its books the $1.7-billion purchase of the remaining 50% of USA Networks as well as the costly prime-time television business.

“Edgar was under pressure to improve the stock price,” said one source close to Universal. “No one has focused on how much this will improve Seagram’s bottom line. TV production isn’t good for anybody, especially the hour business [drama production], and wasn’t going to be for Universal.”

Sources say the Diller transaction came together with such haste that the partners had not thought through the implications of leaving comedy production out of the sale and reversed the decision after realizing the cost of maintaining two studio groups, for comedy and drama. Sources say Diller had initially shied away from comedy because of the surplus of mediocre sitcoms on the network.

But Hollywood insiders are still scratching their heads in part because there are so few parallel situations. Perhaps the closest model is the portfolio approach perfected by cable mogul John Malone and borrowed of late by Rupert Murdoch, who has used partnerships to finance expansion of News Corp. into sports and children’s programming.

Malone has hedged his bets and built influence in every aspect of entertainment by taking minority stakes in a multitude of assets, from cable channels and satellite television to Internet and telephone services. This strategy depends more on picking the right opportunities and backing visionary managers than operating businesses.

Malone vastly increased the value of his stake in the Home Shopping Network and a dozen weak television stations by giving control to Diller in 1995. Likewise, Bronfman hopes Diller will bring the Midas touch to his weakest asset, television.

But in the process, Universal undermined the domain of Chief Executive Frank Biondi Jr., whose expertise is cable television.

Bronfman acknowledged last week when the deal was announced that Biondi wasn’t privy to the negotiations with Diller until there was some “traction,” but has since gone to great lengths to assure Universal staffers that transferring control over television to Diller is in no way a slap in the face to the chief executive, who has been on the job less than two years.

Sources who know Biondi say he is livid and they don’t blame him. He’s essentially losing control of the business he knows best.

“It’s a total dishonor,” says one individual who does a lot of business with Universal.

One source close to Biondi, however, suggests, “You should ask if he’d take the job if it was offered today. I think he would.”

Last Tuesday, at Universal’s annual “town hall” meeting at the Universal Amphitheatre for some 4,000 rank-and-file workers from across the world, Bronfman made a point to give Biondi and TV chief Greg Meidel a vote of confidence, says a source who attended. The source described Biondi as being very “upbeat” in his address.

Senior TV executives at Universal were caught off-guard when the deal was announced, and are still trying to sort out what it means to their futures.

One thing, however, is clear: Bronfman was bent on being in business with Diller, his friend of 20 years and unofficial advisor.

“Bronfman wanted Diller so much, he humbled his own CEO and was willing to sell his own assets and give up 55% of his television business to someone else,” said one industry veteran.

Another characterized the sale as, in effect, an extremely expensive personnel contract, with Diller essentially working for Seagram in exchange for the leverage the television assets will give his operation in the near term.

Under the deal, Seagram can increase its stake in HSN after four years. If Diller leaves, control of the company, which would be renamed USA Networks Inc., would revert to Seagram.

Besides the shopping channel, Diller’s company owns a group of TV stations, and recently bid to buy the remainder of Ticketmaster. Diller would pick up 300 Universal employees through this deal, and though production would remain on the lot for the short-term, sources foresee moving the headquarters to an adjacent location.

One high-ranking television executive said that Diller has proven to be an astute deal-maker since leaving Fox in 1992, and that, while the deal may be good for both sides, Diller came out on top. He speculated that Diller would build the value of USA Networks before selling control to Seagram within four years in exchange for a huge stake in the Canadian beverage and spirits company. Diller, he speculated, would then become a key figure at Universal in much the same way that Mel Karmazin and Ted Turner, in selling their companies, have become major players in Time Warner Inc. and Westinghouse Electric Corp., respectively.