Diller Pines for Independence Day

Barry Diller is struggling to be a Francophile, but it’s not clear whether the beret fits.

The proposed purchase of Seagram Co., the largest owner of his USA Networks Inc., by French media and utility giant Vivendi could free Diller from the overly protective Seagram, which has restricted his growth. Vivendi may allow Diller to make some big purchases and become the A-list media player he has yearned to be.

But even as he plays footsie in public with Vivendi Chief Executive Jean-Marie Messier, the opportunistic media mogul is plotting with his friends and his other owners to break free.

“That’s what he should be doing,” said one investment banker. “He’s in a straitjacket. During the honeymoon period, Messier will tell him nice, positive things, but Barry wants to control his own destiny. He has to figure out a way to get free and grow, otherwise he’s marginalized.”

USA Networks said that it would not respond to speculation and that Diller was “cautiously optimistic” about his coming partnership with Vivendi.

Just the news that Seagram could be out of Diller’s hair has driven up USA’s stock 26% since the Seagram-Vivendi deal was confirmed June 15. The prospect that Vivendi will give Diller a blank check for a shopping spree has raised Wall Street’s expectations.

USA might now be able to move to buy an EBay, an NBC or a DreamWorks SKG--simultaneously accommodating Diller’s wish list of acquisitions as well as Vivendi’s march to expand in the U.S. and into the big leagues alongside the future AOL Time Warner, Viacom, News Corp. and Walt Disney Co.

Still, Wall Street sources say, Diller’s hedging his bets. Diller controls USA but Seagram--and soon Vivendi Universal--under the partnership agreement can veto acquisitions large enough to dilute Seagram’s stake in USA. Seagram chief Edgar Bronfman Jr. has used those powers at critical times to thwart Diller’s expansion.

So, Diller has three options, analysts say: Kiss up, pony up or leave.

He must kiss up to Messier, the 43-year-old former investment banker whose aggressive push over the last four years has transformed the French utility into a global media giant. Or, he will have to pony up to buy out or reduce Seagram’s hold on USA. Otherwise, he will have to abandon the company he controls and hand it over to Seagram, as called for under the partnership agreement.

“Barry will come up with something creative,” a Wall Street source said. “He’s exploring structures, not necessarily financing mechanisms.”

It’s doubtful that Diller would give up a company he has worked the last five years to assemble from a hodgepodge of hand-me-down assets from friends such as investment banker Herbert Allen and cable mogul John Malone. Today, USA, which includes the Home Shopping Network, a motley group of TV stations, USA Network and Ticketmaster, is valued at more than $16 billion, with Diller’s stock and options worth about $1 billion.

To leave would mean Diller would have to start from scratch to fulfill his promise after leaving News Corp. in 1992 never to work for anyone else again. Besides, after failed attempts since then to buy CBS, Paramount Communications, NBC and Lycos, Diller still has a lot to prove.

More likely, he will play up to the ambitious Messier, who pines to be a media king. Without USA, Vivendi faces federal ownership rules that prevent foreign companies from controlling broadcast stations or networks such as NBC.

In the States, Vivendi will struggle as every other outsider has to break into the clubby media world. With Diller, Messier could glide gracefully into media’s inner circle on the arm of one of its legendary knights.

For Diller, however, the wild card remains what power his nemesis Bronfman will have in the new company. Diller secretly hopes that Messier will drive Bronfman out of his operating role after the merger closes. His fear is that the Bronfman family will use their clout as the largest shareholder of Vivendi and on the board to continue to prevent USA from making large acquisitions.

The bad blood between Diller and Bronfman stems from the 1998 sale to USA by Seagram of most of Universal Studio’s television businesses. While Hollywood pointed to the deal as evidence of Bronfman’s naivete, the liquor scion got the last laugh, making it impossible for USA to merge with NBC and buy a television station group.

Sources say Diller is feeling out the two backers who have helped bootstrap him in the past: cable mogul Malone and computer billionaire Paul Allen.

Malone’s Liberty Media Group holds a 21% stake in USA Networks. After Diller left News Corp., Malone made him a partner in late 1992 in QVC, the home shopping channel. When that ended in disaster Malone, who at the time also controlled leading cable operator Tele-Communications Inc., backed Diller’s bid for Paramount Communications.

They lost to Viacom after a bruising court battle. Undeterred, Malone came to Diller’s rescue again, handing him QVC’s ailing rival, Home Shopping Network, along with a handful of TV stations that became the foundation of what today is USA.

USA’s first major purchase was Ticketmaster, which was orchestrated in concert with Allen, the ticket broker’s largest investor who had grown frustrated by the ticketing company’s slow migration to the Internet. In 1997, Allen swapped his 47.5% stake in Ticketmaster for 11% of Diller’s company, which today is an electronic shopping giant.

Wall Street sources say Allen and Malone are eager to take USA Networks to the next level and might contribute assets that would reduce Seagram’s or Vivendi’s stake.

One scenario has Allen, looking for an exit strategy from his $2-billion investment in Dreamworks SKG, contributing the Hollywood studio to USA Networks.

For his part, Malone is sitting on a mountain of cash at Liberty after the sale of TCI to AT&T.;

Universal executives say that with Vivendi and Seagram preoccupied by their complicated deal, nothing is likely to happen with USA before at least the end of the year.

In the meantime, Diller will continue plotting and pressing his allies for the keys to his independence. Vivendi will take the reins that Seagram has used to restrain USA.

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What Next?

Barry Diller is calling on his partners to blunt Seagram’s influence over his USA Networks, even as Videndi proposes buying the liquor and entertainment giant. News that Seagram could be out of Diller’s hair has increased USA’s stock price by 26% this month.

Seagram’s Universal Studios, which is being taken over by Vivendi, has the biggest share. *

The network’s stock performance

Monthly closes and latest:

*

USA’s Major Assets

USA Network, No. 1 prime-time cable television network

Sci-Fi Channel, cable television network

Studios USA, motion picture production and distribution

USA Broadcasting, television stations

Home Shopping Network, television retailer

Precision Response Corp., business services provider

Ticketmaster, No. 1 ticketing services company

Ticketmaster Online-CitySearch, No. 1 online local network

Trio and Newsworld International, cable television services

Styleclick.com, consumer merchandise distributor