Vivendi OKs $10-Billion Deal to Buy Diller’s USA

French conglomerate Vivendi Universal has approved a $10-billion purchase of the entertainment assets of Barry Diller’s USA Networks in a complex stock deal that puts the veteran entertainment mogul at the helm of one of Hollywood’s hottest studios, a source close to the negotiations said Saturday.

Under the deal, which USA’s board is expected to approve today, Diller would head a new Vivendi-controlled company that would combine its Universal Studios theme parks and movie studio with his cable networks, television production unit and film company.

Vivendi, the world’s second-largest media company, is betting that Diller can expand its presence in the U.S. to compete with the likes of AOL Time Warner, Walt Disney Co. and Viacom. The brilliant but combustible operator is credited with being an architect of the modern media world.

Tapping Diller is seen as a coup for ambitious Vivendi Chairman Jean-Marie Messier, because Diller has long said he was not interested in working for someone else.

“For Jean-Marie Messier to have gotten Barry to come inside the tent and offer his services, whatever those are going to be, is a real home run,” said Jeffrey Katzenberg, a partner in DreamWorks SKG who worked for Diller for several years at Paramount Pictures.

But Diller’s hard-driving style is expected to roil the entertainment industry as well as the executive suites at Universal Studios. The consummate industry insider who has powered two studios and created a broadcast network will be put in charge of the movie studio that produced such lucrative film franchises as “Jurassic Park” and “The Mummy.” The new company will be combined with Diller’s USA Network, Sci-Fi Channel, the “Law & Order” television series and a film company that produced last year’s Oscar-winning “Traffic.”

The deal also would reunite Universal with assets that former owner Seagram sold to Diller in 1998 for $4.1 billion. Universal, which has owned 43% of USA Networks, now would have controlling interest in USA’s entertainment business.

However, USA is not selling its Home Shopping Network and Internet companies, which include Ticketmaster. And Vivendi plans to keep Universal Music Group, the world’s largest music company, and its publishing operations separate from the Diller-controlled company.

According to the source, the proposed deal involves mostly stock, including some of Vivendi’s share in USA, though precise terms were not known. The deal is subject to approval by USA Networks shareholders. It’s unclear whether the purchase must also be reviewed by federal regulators.

Neither Vivendi nor USA officials were available to comment.

Vivendi’s board approved the deal Friday, the source said, the same day it announced its plan to buy an 11% share of satellite television service EchoStar Communications. That deal would allow Vivendi to deliver its TV shows and movies over EchoStar’s satellite service, which reaches 6.5 million homes across the country.

The acquisitions are part of Messier’s aggressive strategy to take on U.S. entertainment giants on their own turf and strengthen the company’s presence in the U.S. Earlier this year, Vivendi acquired independent book publisher Houghton Mifflin for $1.7 billion and music downloading Web site MP3.com Inc. for $372 million.

But Messier, who recently moved from Paris to New York, has had trouble convincing Wall Street that Vivendi is a bona fide rival to AOL Time Warner Inc. or any other media giant. One major gap for Vivendi has been its lack of distribution outlets, such as cable or broadcast channels in the U.S.

The challenge for Diller will be to forge a cohesive core company that he can sell to Wall Street. He will need the financial community’s support to fund Universal’s further expansion.

Playing on a par with News Corp.’s Rupert Murdoch and Viacom’s Sumner Redstone is the one thing Diller, 59, has tried but failed to do. His company, USA Networks, is a small if innovative firm in an industry dominated by giants.

“With Barry there, Universal is the place of the moment,” said Graydon Carter, editor of Vanity Fair and a Diller intimate.

Carter called the Universal arrangement a “step deal,” adding that he understands Vivendi will buy several more assets in the coming months as the French company shifts its emphasis from its core water and sewage business to movies and television. Vivendi also operates Europe’s biggest pay-TV service, Canal Plus, with more than 15 million subscribers.

Network Seen as Crucial Piece

In today’s consolidated industry, it is crucial for media companies to own stakes in all aspects of media and entertainment, and Universal has been short some key pieces, specifically a broadcast network.

AOL Time Warner, for example, has been able to capitalize on the success of the Warner Bros. movie “Harry Potter and the Sorcerer’s Stone” across its Internet, magazine and television properties. When Universal released its holiday blockbuster, “Dr. Seuss’ How the Grinch Stole Christmas” last year, it lacked the same opportunities, and had to spend tens of millions of dollars in advertising to keep the film in the public eye.

The prospect of Vivendi snagging Diller has captured Hollywood’s attention. Universal is a prized asset that seemingly made little sense wrapped inside a company that is predominantly a European utility. Diller is a Wall Street darling who gives Vivendi credibility among U.S. investors. He also is expected to help expand Universal’s much-needed U.S. cable and television distribution.

After reordering prime-time programming with the invention of the “Movie of the Week” as a twenty-something executive at ABC, Diller led Paramount Pictures in its 1970s and early ‘80s heyday, when it produced movies like “The Godfather,” “Raiders of the Lost Ark” and the TV show “Cheers.”

Diller then joined Murdoch’s Fox, where he defied the conventional wisdom of the television industry by successfully launching a fourth broadcast network.

Much of Hollywood is led by Diller proteges from his days at Paramount, including longtime friend Disney Chairman Michael Eisner and Katzenberg, said Marty Kaplan, associate dean at the USC Annenberg School for Communication. “I see it as a huge positive for Universal. He brings with him a kind of ‘present at the creation.’ ”

Diller is a darling of both the Los Angeles and New York social scenes. “He has a huge X-factor,” said Carter, noting that Diller knows “everyone.” A college dropout raised in Beverly Hills, Diller started his career in the William Morris Agency mail room, quickly rising through Hollywood’s executive ranks. He was a bachelor until he married fashion designer Diane von Furstenberg, a longtime friend, earlier this year.

Diller has continued his innovations at his latest company. Merging traditional media with the emerging online world, he cobbled together more than 30 acquisitions in the last two years, creating a company worth about $18 billion. Joining Ticketmaster and Home Shopping Network with a clutch of Internet shopping and service companies, he has catapulted USA Networks to the top echelon of Web merchants, second only to EBay.

Leveraging his USA and Sci-Fi cable networks, Diller again has reordered television programming by proving that a first-run episode of a popular show can be aired more than once a week. By airing episodes of the “Law & Order” series both on NBC prime time and his USA cable network, Diller enhanced the value of the show. That practice now is being embraced by the rest of the TV industry.

Last month, for instance, Walt Disney Co. spent $5.2 billion to buy the Fox Family Channel, primarily to have a second outlet for its ABC television shows.

Success has not mellowed Diller, according to current and former executives. He remains an executive who demands to be part of the process of decision-making throughout his companies, often making the final choice of which movies and television shows to produce.

“He always brings an enormously probing, challenging, creative environment,” said David Kissinger, president of USA Television Production Group. “Nothing is sacred. Nothing assured. Everything is up for debate.”

Said Joe Roth, who ran Twentieth Century Fox Studios under Diller, “I didn’t find him to be erratic. Explosive, yes.

“He wanted you to be able to defend, clarify, explain and give blood,” said Roth, who now runs his own film company. “If you didn’t stand up to him, or couldn’t, you had a real problem. It wasn’t going to work.”

Some See Change as Bad News

That will be a huge change for the people who have been operating Universal’s highly successful movie studio, a privileged group of young executives who have known unprecedented autonomy at a time when the rest of the movie industry has been operating under the thumb of corporate managers.

Universal has one of the best box office records in the business right now with breakout hits like “Fast and Furious,” “American Pie,” “The Grinch” and “The Mummy Returns.” Universal Pictures Chairwoman Stacey Snider has attributed much of that success to the high degree of freedom she enjoys under Universal Studios President Ron Meyer.

“Obviously, this is bad news for Stacey and Ron,” said a film producer who has his office on the Universal lot. “Barry will change things. It will be different here.”

The pending arrival of Diller already has executives mourning the passing of an era. Yet, in some ways, the signs of change were already there. In recent months, Vivendi executives had started to impose themselves in marketing discussions and other studio decisions, irritating executives who believed that their track record should have insulated them from close scrutiny.

Another producer, who also asked not to be identified, said it would hurt the studio to lose its independent spirit. “This studio is working famously, the morale, the product, the culture. The most important thing to me is that the management gets to continue doing what they’ve been doing.”

Neither Snider nor any of the other studio executives would talk about the pending changes or the prospects of reporting to the demanding Diller.

Wall Street responded to the deal speculation by sending Vivendi stock down 4% last week, closing Friday at $48.95 per share. USA Networks shares spiked up on the deal news but closed down 6% at $23.82 per share.

“Messier desperately is trying to establish credibility in the U.S. market both in the eyes of investors and the eyes of the industry,” said Michael Hilton, a media industry analyst with ABN Amro in London, noting that Universal has a glaring lack of U.S. distribution that is only partially addressed with the purchase of Diller’s two cable networks. Neither company owns the crucial piece of a modern media company, a broadcast network.

Vivendi’s Messier “wants to be accepted as someone who’s on an equal footing with the Dillers,” said Hilton. “It’s much easier to do that if you have Diller.” The market would be concerned if Messier bought USA Networks without Diller on board, he added.

Friday’s announcement of Vivendi’s investment in EchoStar is another step toward impressing Wall Street with Vivendi’s commitment to building its media assets. The deal secures an alliance that provides an eight-year distribution channel for Universal.

The prospect of Diller joining Vivendi stunned many in Hollywood because the media executive has long rejected the idea of working for someone else.

In 1992, Diller quit his job as chairman of Fox Inc. in a public declaration that he would build an independent media empire he could control with impunity. “He was hellbent on making sure the final decisions were up to him,” said Roth. “He wanted to control his destiny.”

That decision has led to a long, frustrating chapter in Diller’s career. The deals he wanted to do didn’t always break his way.

Diller invested in the second-rate home-shopping channel, QVC, in December 1992, becoming the company’s chairman. Using QVC as an investment vehicle, Diller made a bid to buy Paramount Communications in the fall of 1993. He lost the $10-billion bidding war to Viacom.

The next year, Diller’s plan to merge QVC with CBS was derailed by cable company Comcast, which acquired control of QVC and quashed the deal.

Diller bought television stations, movie production companies and the Home Shopping Network in an effort to create a critical mass of media properties that one day might add up to more than the sum of their parts.

When he bought the Universal television assets for $4 billion--nearly the same assets he is selling back now to Universal parent--Diller faced further frustrations. The deal gave then-Universal owner Edgar Bronfman Jr. 43% of Diller’s company and final say in major acquisitions. Bronfman used that veto power to kill a Diller proposal to buy NBC. Diller also dropped a subsequent bid to buy Internet company Lycos.

Some Concerns About His Style

Some analysts question whether Diller’s relationship with Messier will fare any better.

Diller told investors of USA Networks that his chief interest is in expanding USA’s new media business. “The concern I have [with the Universal deal] is that Barry Diller had made it clear to the market that he doesn’t necessarily want to report to anyone, particularly Messier,” said Mark Harrington, an analyst with J.P. Morgan.

“He’s a formidable player and he’s unlikely to be an instrument of other people’s talents,” USC’s Kaplan said. “There may be a happy match between what [Messier] wants and what [Diller] wants, but he’s not an executive for hire. He’s a brand name.”

Just what Diller plans to do at Universal is unclear.

“Barry has a huge game plan that he carries around in his head,” said Vanity Fair’s Carter. “He’s like a writer with a novel, all the threads coming together in his head.”

With the deal still not closed, Diller isn’t sharing what’s on his mind. And, according to people close to him both personally and professionally, he hasn’t been talking about any grand strategy for the Universal entertainment assets.

But Diller’s track record managing the assets he will take with him to Universal--primarily USA Network, Sci-Fi Channel, the television and movie production companies--suggests he will be deeply involved in everything.

According to his current executives, Diller personally made the decision to tone down Jerry Springer’s toxic talk show, and he pulled the plug on USA Network’s wrestling programming.

Springer’s ratings waned, then recovered, but viewing of USA has dropped nearly 20% during 2001, due in part to the loss of wrestling.

The decision to run “Law & Order” on USA Network in concert with the NBC prime-time run was Diller’s most explosive move.

It took six months to persuade NBC to go along with the experiment, said show creator Dick Wolf. “They said no, no. Barry wouldn’t budge. Barry doesn’t budge. It was bloody.”

In exchange for a price cut on the show, NBC finally caved. “Barry is the only one with the intestinal fortitude to do this.” Three different “Law & Order” weekly series now run on network prime time with repeats on cable channels, and all are climbing in the ratings.

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Diller’s Deal

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