Diller Adding to Empire With Deal for Two Film Distributors

After months of on-again, off-again negotiations, USA Networks has struck a deal in principle with Universal Studios to acquire its 51% stake in specialty film distributor October Films as well as the domestic assets of PolyGram Filmed Entertainment, sources said.

The transaction is said to be valued at between $100 million and $200 million. It includes the acquisition price and some distribution advances related to unreleased movies.

Sources said the deal, which is subject to approval by the companies’ boards, is primarily cash, with 10% to 20% to be paid out in USA stock.

USA Networks Chairman Barry Diller, who first expressed interest in October and the PolyGram assets last year, could not be reached for comment late Friday. Universal officials could not be reached for comment, but a highly placed source in the company said the deal has not been finalized.

Sources said the deal includes Universal’s 51% stake in October, whose prestige titles include “Hilary and Jackie,” “Secrets and Lies,” “The Apostle” and “Breaking the Waves,” as well as PolyGram’s specialty film distributor Gramercy Pictures. Both companies have had a mixed track record at the box office.

Sources confirmed that Diller plans to combine the two film distributors and aggressively compete with specialty movie powerhouse Miramax Films, the Walt Disney-owned, New York-based distributor headed by brothers Harvey and Bob Weinstein.

While Diller, the former head of Paramount Pictures, has made it very clear that he has no interest in or intention of expanding into the high-cost mainstream movie business, he is also clear in his resolve to have a seat at the table distributing high-quality, lower-risk films that can be made and marketed at a modest cost.

In addition to his desire to exploit their theatrical value, Diller wants to use his film libraries to build an arts cable channel.

It is unclear whether PolyGram’s one-third stake in the Sundance Channel is part of the deal, but sources said the channel’s other two owners, Viacom and actor-director Robert Redford have veto power over any transaction. So far neither has publicly endorsed such a move.

Diller has had negotiations to buy Cablevision Systems’ four national cable services, which include Bravo and the Independent Film Channel. The status of those talks is unclear

Diller has built USA Networks into a growing media empire, with the USA cable channel, Home Shopping Network and Ticketmaster among other assets. Most recently he proposed a deal combining some of his assets with Lycos in a major play to build Internet assets.

Sources said Scott Greenstein, a co-president of October and former executive at Miramax, will emerge as the top executive at the combined October-Gramercy operation.

The deal throws into question the fate of co-Presidents and minority shareholders Bingham Ray and John Schmidt. Sources speculate they will leave since they had opposed an earlier offer by Diller to buy the company, as did Gramercy chief Russell Schwartz. Sources said that while Diller wants to keep Schwartz aboard, he may be unwilling to report to Greenstein.

Universal bought a 51% stake in October two years ago for an initial $10 million (and as much as $50 million depending on the company’s future performance). The other 49% of the company is owned by minority shareholders led by Diller’s longtime investment banker and friend, Herbert Allen Jr.

Other assets in the USA deal include all of PolyGram’s film development properties and its domestic television and video operations. PolyGram’s crown production jewel--Britain-based Working Title Films, headed by partners Tim Bevan and Eric Fellner--is not part of the package.

Also excluded from the deal is PolyGram’s international operation.