Malone Sees Value in Key Vivendi Assets

Cable television industry titan John Malone has plans for Universal Studios that could create a new entertainment conglomerate--and potentially make him a fortune. The challenge is whether he can structure a deal that gives Vivendi Universal the cash it desperately needs right now.

Malone wants to marry the cable channels he controls through Liberty Media Corp. with the Vivendi Universal Entertainment assets run by his old friend Barry Diller, according to sources. Rolling up the Starz Encore pay cable TV networks and the various Discovery cable channels along with Universal Studios film, television and theme parks--and possibly Universal Music--would create a new entertainment behemoth that could be launched in an initial public offering at a later, more opportune time.

But for Vivendi, that time is now.

With a pledge to begin selling off assets to raise $9.8 billion to stem a liquidity crisis, Vivendi Chairman Jean-Rene Fourtou is looking for cash, not a long-term investment strategy.

While a merger with Malone would allow Vivendi to salvage some value for its Hollywood investments, it would take time to launch a new company.

“It’s not a quick way [for Vivendi] to raise cash,” said Katherine Styponias, media analyst with Prudential Securities.

Fourtou has sent conflicting signals on whether Vivendi will remain a global media company or revert to being a French water and sewer company. That decision along with a range of options for reducing debt and restructuring the company will be addressed at Vivendi’s board meeting next month.

One option, a proposal from Haim Saban, Power Ranger impresario, to buy Vivendi’s 10% stake in the EchoStar satellite television company along with its five still-unprogrammed channels on the satellite system probably will be on the table, said people familiar with Saban’s bid.

Another possibility, a deal between DreamWorks SKG and Vivendi Universal, was denied Tuesday by DreamWorks partner David Geffen, who said his company had no interest in buying or investing in Vivendi’s U.S. entertainment assets.

“We are not involved in any scenario to buy these assets, never have been and never will be,” Geffen said.

Whether Malone’s gambit makes it off the table and onto the agenda is yet to be determined.

Malone declined to be interviewed for this report and a spokesman for Liberty Media declined to comment on the possible deal. Vivendi declined to discuss potential deals involving Universal Studios.

With Liberty Media holding a nearly 4% stake in Vivendi, it is clear that Malone will be a player in whatever happens to Universal Studios. He has a long history with Vivendi Universal Entertainment Chairman Diller, investing in several of the Hollywood mogul’s previous ventures. Malone holds a 22% stake in Diller’s other company, USA Interactive, an e-commerce company that is a darling of Wall Street.

And Malone has the financial clout to make things happen.

“This is a classic Malone: looking to pick up assets when they might be up for sale under less than fortunate circumstances,” Styponias said.

Liberty’s $4-billion net debt is more than offset by about $14 billion in investments in cable companies, she said, and the company also has about $2 billion in cash.

Analysts have estimated that Vivendi’s U.S. entertainment assets, including Universal Music Group, are worth $15 billion to $22 billion. Starz Encore and its 50% stake in the Discovery Channel are worth an estimated $7 billion to $11 billion.

Malone could end up with a 46% stake in the proposed new entertainment concern, Styponias said, after contributing only about a third of the assets: “It looks like a great deal for Liberty.”

Leveraging Malone’s undervalued cable assets with Vivendi’s undervalued entertainment assets is a smart move, agreed Larry Gerbrandt, chief content officer for Kagan World Media, a Carmel-based media research firm. Liberty’s and Vivendi’s entertainment businesses fit well strategically, he said, noting that Starz Encore runs pay movie channels that could be an outlet for Universal movies.

Besides, having Malone as a major investor in the proposed new company would raise the value of Vivendi’s businesses and make its assets more attractive to investors in a public offering.

“He’s very well regarded on Wall Street. They admire him for his deal-making prowess and his discipline,” Gerbrandt said.

During the cable industry’s early, high-octane growth years in the 1970s and 1980s, Malone earned a reputation as one of the media industry’s toughest deal makers as well as one of its savviest investors. Wall Street investors learned to respect the man who built Denver area-based cable operator Tele-Communications Inc., or TCI, into a powerhouse that dominated the industry.

When the reclusive Malone sold TCI to AT&T; Corp. for $46 billion in 1999, his other company, Liberty Media, primarily a holding company for television programming assets, became his investment vehicle. Flush with billions of dollars in cash, Malone has been trying to re-create his U.S. cable success in Europe’s less mature cable industry.

That effort hasn’t been going so smoothly.

“The European strategy depends on regulatory approvals. Some people are masterful at handling politicians. John has utter distain for the whole process,” said one former Liberty executive.

Although Liberty’s balance sheet is healthy, the company’s stock price has suffered, in part because the company is a major holder in AOL Time Warner Inc. and because of its cable investments in Europe. Like the U.S. telecom business, the European cable business is reeling. Many cable operators borrowed too much and relied on excessively optimistic revenue projections.

“In the late 1990s, there was an incredible mystique surrounding Liberty Media. A lot of that mystique is now gone and investors are looking a little more soberly at the business,” said Paul Kim, an analyst with Kaufman Bros.

Speculation about a deal involving Vivendi and Malone comes as Vivendi has announced plans to unload Boston publisher Houghton Mifflin and non-core assets of European pay TV company Canal Plus as it struggles to deal with more than $19 billion in media-related debt.

Vivendi’s shares plummeted 45% last week after credit rating companies cut their ratings amid concerns over the company’s cash crisis. On Tuesday, the stock rose 5.3% to $12.56 on the New York Stock Exchange.

Shares of Liberty Media rose 52 cents, or about 6%, to $19.15, also on the NYSE.

In a letter intended to assure shareholders Monday, Fourtou said the company was “on the verge of default” when he took over from former CEO Jean Marie Messier last month, but is negotiating $3 billion in short-term financing.

Also Tuesday, Vivendi Environnement’s bond holders agreed to further distance the unit from its parent firm by agreeing to release the utility from its obligation to buy out bonds if Vivendi Universal defaulted on its own borrowings.