Vivendi May Sell U.S. Units in Effort to Exit From Hollywood

Vivendi Universal’s dire balance sheet isn’t the only driving force behind the company’s apparent desire to sell, or spin off, its U.S. entertainment businesses.

Most company observers think the French media giant is sniffing out buyers not only to raise cash but because the new Gallic board members know little about the media business and share a suspicion of Hollywood, both as a cultural export and a business investment.

In fact, despite the success of Universal Pictures, many in France viewed former Chief Executive Jean-Marie Messier’s spectacular ouster last month as another example of French companies flaming out in Hollywood.

“It’s well-established opinion in France that it’s not possible for French people to play an active role in Hollywood,” said Jean-Paul Pierret, manager of the Paris brokerage house Natexis Capital. “The French have never considered Universal part of the French culture. I don’t think they want to keep any presence in this kind of business.”

Whatever restructuring plan Vivendi’s board adopts, one thing is clear: The company ultimately is expected to dismantle the sprawling global media empire that Messier built on a strategy that confounded investors and left Vivendi with crippling debts.

A plan could be voted upon as early as the board’s next meeting Sept. 25.

“It sounds to me like their thinking is: Give to France what is France’s and give to America what belongs to America,” said New York money manager Mario Gabelli, whose clients own more than 4 million shares of Vivendi. “What do we know best? Cegetel [telecom], Canal Plus [pay TV company] and Vivendi Environnement [water]. What do we want Hollywood for?”

Vivendi CEO Jean-Rene Fourtou recently told employees that the company would not sell Vivendi Universal Entertainment. That’s possible, given the bleak financial markets and Fourtou’s eagerness to recoup some of the huge losses Vivendi shareholders have sustained, some analysts say.

But Vivendi may, for example, decide to be a major stakeholder in a company that would be spun off. Barry Diller, chairman of Vivendi Universal Entertainment, is said to be working on such a plan.

That scenario might be appealing to the new stewards of Vivendi, who have little knowledge of the U.S. media business. Fourtou, for example, spent much of his career at the chemical and pharmaceutical company Rhone-Poulenc and in the last few weeks has been trying to acquaint himself with Universal’s music and movie businesses.

“If you look at the background of Fourtou and the management team they’ve brought in, they are very French, closely tied to the government and have no experience in the media sector,” said Mark Harrington, an analyst with J.P. Morgan. “I think that’s an indication as to their intentions.”

And unlike Messier, who went out of his way to woo Wall Street by quickly moving to New York and publicly embracing America, Fourtou has exhibited no such tendencies. In fact, Fourtou, who represents the French business elite that Messier so offended, will pay his first visit to the New York office next month. And in a move that disappointed Wall Street, Fourtou reported the company’s second half results under French, not U.S., accounting standards.

The Vivendi board itself embodies many of the cultural tensions that came to a boil during Messier’s tumultuous tenure. The board’s French and North American factions bickered for months about the company’s strategy in the face of its falling stock price before they finally found one thing they could agree upon. Led by the Bronfman family of Canada, the board toppled Messier in a dramatic boardroom coup last month. Not many expect to see such unity again on the 14-member board, which is dominated by the French.

“This is an unworkable, unholy alliance that won’t last,” said Jeffrey Sonnenfeld, associate dean of the Yale School of Management, who has expertise in French business. “The only person who could have blended these cultures was Messier, and he failed. A breakup is inevitable.”

Vivendi’s French board members certainly are keenly aware of the long list of French companies that have bombed in Hollywood.

Among them was French bank Credit Lyonnais, which suffered huge losses in Hollywood in the early 1990s after a number of loans to production companies soured. After foreclosing on a loan, the former state-owned bank was forced to take control of the Hollywood studio Metro-Goldwyn-Mayer Inc. in 1992. Four years later, Lyonnais sold MGM for $1.3 billion after investing almost twice that amount in it.

Before Vivendi bought it, Canal Plus, the leading European pay TV company, was once a big financier of Hollywood movies. In the early 1990s, Canal Plus invested in the now-defunct Carolco Pictures and also took a hit on a much-ballyhooed partnership with Arnon Milchan’s Regency International Pictures and Warner Bros. After losing millions, the company announced it was pulling out of Hollywood in 1995, although it remains a Hollywood investor and one of the biggest buyers of Hollywood movies in Europe. Recently, its deal to finance the movie company run by onetime super agent Michael Ovitz fizzled.

One of Vivendi’s newest and most influential board members, Claude Bebear, also knows too well the perils of Hollywood. French insurance giant Axa, of which he is chairman, was a key player in film financing from 1994 to 1998, when the company wrote $2-billion worth of insurance policies guaranteeing that banks would be paid even if film revenue fell short and didn’t cover costs. Axa covered more than 100 movies, including “The Saint,” “U-Turn” and “The Mirror Has Two Faces.” Despite huge premiums, the policies were a big loser for Axa. The company took a $1-billion reserve against losses and is embroiled in a lawsuit accusing the Hollywood bankers of fraud.

Vivendi Universal executives already have begun exploratory talks with several companies interested in Vivendi’s American entertainment businesses, according to sources familiar with the matter.

The prospective deals could involve the outright sale of Vivendi’s movie, television and theme park properties or the creation of an entertainment company. Among those who have expressed interest are cable industry magnate John Malone, who owns nearly 4% of Vivendi and General Electric’s NBC television network.

Persistent speculation on Wall Street also has DreamWorks SKG playing a role, although partner David Geffen has vehemently denied any interest.

It’s unclear what proposal Vivendi’s board will accept--and how quickly the company will be able to carry it out. Any sale or merger could be slowed by a quagmire of tax and legal complications associated with untangling the complex acquisitions Messier orchestrated, sources say.

So far, Fourtou has given conflicting signals of his intentions. For example, he announced his plan to unload Houghton Mifflin just two weeks after telling employees in an e-mail it was not on the block. Fourtou further puzzled investors when he told employees and shareholders recently Vivendi may increase its stake in the water business, another reversal of Messier’s strategy.

It was in that e-mail that he said Vivendi Universal Entertainment would not be sold. But Vivendi’s balance sheet could ultimately force the matter.

To stem a cash crisis, Fourtou has pledged to secure a nearly $2-billion loan and raise $9.8 billion over the next two years from the sale of mostly non-core assets, including Houghton Mifflin, a 10% stake in EchoStar Communications and the Italian pay TV company Telepiu.

Even after those sales, however, Vivendi would still be several billion dollars short of the $9.8-billion target, analysts say.

“Vivendi will fall shy of its target and will inevitably be forced to swallow its pride and commit to selling one of its core assets,” predicted Michael Nathanson, media analyst at Sanford C. Bernstein in New York.

Times staff writer Meg James contributed to this report.