Dispute With USA Complicates Vivendi Reorganization

A thorny tax dispute with Barry Diller’s USA Interactive is adding another layer of complication to Vivendi Universal Chief Executive Jean-Rene Fourtou’s plans to reorganize and possibly spin off the Los Angeles-based entertainment group.

The dispute surfaced Friday when USA Interactive, the electronic commerce company, accused Vivendi’s U.S. entertainment division of reneging on an agreement to cover its tax payments. Vivendi this year paid $11 billion for a 5.4% stake in USA’s entertainment assets, which include Universal Studios, and formed Vivendi Universal Entertainment.

USA contends that Vivendi agreed to cover taxes stemming from the transaction. The tax liabilities reportedly are valued at as much as $620 million over 20 years.

“USA has advised Vivendi that the contract language is entirely clear on this point and, in fact, was the subject of negotiation between the parties,” according to USA’s filing with the Securities and Exchange Commission. “USA has asked VUE and Vivendi to acknowledge the obligations expressly set forth in the agreement.”

Vivendi shot back Sunday, saying it “disagrees with USA’s interpretation of their partnership” with respect to the tax obligations. The Paris-based conglomerate added in a statement that “various matters related to the VUE partnership agreement are currently the subject of review, discussion and negotiation between the parties.”

A Vivendi spokeswoman declined to elaborate on the statement.

Fourtou told analysts last week that Vivendi is busy trying to remove restrictions that limit his ability to sell or spin off the U.S. entertainment group. Diller negotiated the restrictions when he sold to Vivendi his USA entertainment assets, which, in addition to the studio and theme parks, include the USA and Sci-Fi cable channels.

The tax dispute casts a spotlight on Diller’s unusual dual roles as a Vivendi executive and as a business partner. The media mogul essentially sits on both sides of the fence in the dispute because he is chief executive of USA Interactive, which operates such businesses as Ticketmaster and Expedia.com, and is co-chief executive with Fourtou of the newly reorganized U.S. entertainment group. Although Diller does not have an employment contract with Vivendi, he owns 1.5% of the U.S. partnership.

The dust-up also underscores the increasingly complex and murky relationship between Diller and Fourtou, who rescued Vivendi this summer after it nearly filed for bankruptcy protection due to crippling debts from costly acquisitions, including the Universal entertainment operations.

Fourtou has sent mixed signals on his partnership with Diller. Fourtou, who has admitted to knowing little about the entertainment industry, has made it clear he needs Diller to help him manage the Universal movie studio, theme parks and record labels and prepare them for a possible spinoff into a separately traded company next year. Diller has been working on such a plan for months, company sources say.

But Fourtou also has stressed that he will not be solely dependent on Diller and will consider other options, including selling the Universal entertainment group.

Vivendi rebuffed a $13-billion offer by billionaire Marvin Davis for its entertainment assets but will meet with Davis next month, company sources say.