Vivendi, USA Come to Terms on Takeover

The boards of Vivendi Universal and USA Networks Inc. have agreed to merge their entertainment assets into a new company controlled by Vivendi and run by USA’s Barry Diller.

Under the complicated transaction, Vivendi would pay USA between $10 billion and $12 billion in stock and cash for virtually the same assets that Diller bought in 1998 for about one-third the price. Those include USA’s television and film production units, and its USA, Sci-Fi and Trio cable channels.

Those assets would be combined with Universal Studios’ film operations, international television group and theme parks, but not Vivendi’s publishing, music or European pay television businesses. Universal has been on a hot streak for the last two years.

Vivendi would control 93% of the new company, which is estimated to be worth $19 billion. USA would hold 5.5% of the enterprise and Diller would have a 1.4% interest, valued at about $275 million. The deal, subject to approval by shareholders of both companies, is expected to close early next year.

USA’s board approved the merger Sunday after Vivendi directors voted Friday in favor of the deal.

“It means Vivendi’s strategy is coming together,” said Vivendi Chairman Jean-Marie Messier in an interview. “I think people will realize that not only is Vivendi Universal a strong player in Europe but is going to be an absolute major player in the U.S.”

Diller would retain control of USA’s electronic retailing businesses such as Home Shopping Network, Ticketmaster and several Internet sites. USA would be renamed USA Interactive.

Vivendi would have a 12% interest in that company, underscoring its ambitions to use the Internet to sell music, video games and other content to consumers over the Web.

The transactions could set the stage for a longer-term strategy by Diller and Messier to create a rival to AOL Time Warner Inc., with strength in both new and traditional media. Sources say after Diller makes additional Internet acquisitions and tests the marriage with Messier, the interactive company could be folded into the new entertainment venture.

USA and Vivendi were still ironing out the values of the complicated transaction Sunday night, but are expected to announce the deal today.

The merger would catapult Vivendi’s Universal Studios into the U.S. television business after a four-year hiatus and return to Hollywood a contrarian visionary whose leadership is expected to bring some sense to the increasingly irrational economics of the entertainment industry.

“I’m getting an option on Barry Diller and he’s getting one of the most exciting entertainment groups,” said Messier.

The deal enables Messier to shore up strategic weaknesses that have limited Vivendi’s ability to compete toe-to-toe with AOL Time Warner, News Corp., Viacom Inc. and Walt Disney Co. Cable channels are the fastest-growing segment of the entertainment business and allow studios to squeeze more value from their film and television libraries.

Messier said his strategy will be to create “synergies” between the companies, combining Universal’s action suspense channel in Europe with similar programming on the USA Network.

USA cable television channels will give Universal a key outlet for its vast library of movies, allowing Universal to defray rising production costs.

For example, Universal could use the USA Network, one of the top-rated cable channels, to develop sitcoms and spinoffs from its lucrative film properties such as “The Grinch” and “American Pie.”

The deal follows another television distribution deal by Vivendi on Friday, when it announced plans to invest $1.5 billion in EchoStar Communications Corp. for an 11% stake. Vivendi will be able to launch five new channels and develop interactive services on EchoStar’s satellite service, which reaches 6.5 million customers.

For USA, the transaction provides freedom to pursue large acquisitions. Under a 1998 partnership, Vivendi controls a 43% stake in USA Networks that allows it to block acquisitions worth more than $2 billion. The veto rights have restricted Diller’s ability to expand and fulfill his dream of owning a television network and becoming a bona-fide media mogul.

Instead, Diller has turned his attention to smaller deals, consolidating Internet retailing while values are depressed. With $1.65 billion in cash from the sale to Vivendi, he could target such companies as Amazon.com and eventually merge with Yahoo, sources say.

In addition to the cash, Vivendi will return to USA at least $7 billion worth of stock.

The complex transactions also involve a stock swap with John Malone’s Liberty Media, which owns 21% of USA Networks. Malone will retain interest in USA Interactive while exchanging some of his shares for a 3.5% stake in Vivendi, worth an estimated $1.6 billion. Messier hopes Malone, considered an astute investor with major stakes in AOL Time Warner and News Corp., will draw more U.S. investors to the French company.

Diller’s role heading Vivendi’s new U.S. entertainment division would mark the return to Hollywood of one of the industry’s innovators. Diller has historically challenged conventional Hollywood wisdom, especially its tradition of excessive spending. Just as Diller has rewritten economic formulas at USA to squeeze more value from its properties, he is expected to manage Universal with the same emphasis on costs and efficiencies.

Though Diller’s new position is making the current management at Universal Studios nervous, analysts say the executive’s tight-fisted spending practices should benefit Vivendi shareholders as well as the entire industry.

Diller will be taking the reins at a time when soaring production and marketing costs, an advertising downturn and a proliferation of media choices are pressuring margins and the traditional economic models.

Messier said Universal President Ron Meyer and studio chief Stacey Snider have agreed to renew their contracts.

Diller will likely devote his time to deal-making, filling the company’s holes in broadcasting and expanding further into cable.