Vivendi, Ovitz Firm Spar Over Venture

As Vivendi Universal’s purchase of Barry Diller’s USA Networks entertainment assets nears closure, a plan to combine three existing specialty film units has touched off a skirmish between Michael Ovitz’s Artists Production Group and the Paris-based conglomerate.

Vivendi Universal plans to shutter StudioCanal USA, a division of French pay television giant Canal Plus. StudioCanal USA principally funds movies to be made with Ovitz’s APG.

Universal has been negotiating for weeks to end the relationship with APG, arguing over how much of the remaining financial commitment--about $10 million--it still must pay, sources said.

Complicating matters is an audit StudioCanal conducted of APG’s management of the joint venture. The audit took issue with APG’s allocation of staff time. The audit alleges, in part, that APG staffers spent more time on outside film projects than authorized.

The audit also uncovered some small discrepancies, such as several thousand dollars that apparently was misspent on company sweatshirts for a retreat and as much as $15,000 on holiday presents. The audit did not find any funds missing.

StudioCanal agreed in the original pact that APG staff members would be allowed to work on outside projects as long as it did not interfere with the progress of projects in the joint venture, according to the original agreement between StudioCanal and APG. In response to the audit, StudioCanal sent a memo to APG saying it was confident that the division of staff labor had not interfered with the joint venture projects.

The memo also states that, no matter what the resolution of the staffing dispute, the money to cover any discrepancies would come from revenue from those outside projects.

According to several sources close to the talks, Vivendi Universal is using the audit as a way to force APG to settle for less money in breaking the partnership. APG has disputed some of the audit findings but is said to be on the verge of resolving the key obstacles to ending the joint venture.

Vivendi Universal executives declined to comment on the negotiations. StudioCanal executives were unavailable for comment.

APG President Mark Canton, a former chairman of Columbia Pictures, said, “The relationships that we have with Universal are very strong and the projects in development are very attractive.... The business relationship will be altered to make an opportunity to move forward and make those movies.”

With StudioCanal, APG has developed 17 films. None has been put into production.

The deal with Ovitz was signed before StudioCanal was bought by Vivendi and before Vivendi bought Universal Studios a year and a half ago. StudioCanal USA agreed to cover overhead and costs incurred in developing films with APG, about $8 million a year for three years.

The fight has overshadowed the larger issue of Vivendi Universal’s plan to close StudioCanal USA, laying off perhaps 20 employees, according to several sources. Vivendi also will be shutting down its Universal Focus unit, laying off perhaps half a dozen employees.

Diller’s film unit, USA Films, is expected to emerge as the sole specialty film unit for Vivendi Universal. The studio produced this year’s Oscar contender “Gosford Park” and last year’s hit “Traffic.” The still unnamed unit will be headed by USA Films Chairman Scott Greenstein and will command its own marketing and distribution, according to sources.

Greenstein will report directly to Universal Pictures Chairman Stacey Snider.

Universal Focus was a catchall label for small movies that were deemed too insignificant for full-blown marketing campaigns. Although there were surprise hits such as “Billy Elliot” and “Mulholland Drive,” those were the exceptions. Most of Universal Focus’ films were developed by outside production companies, so there was little Universal commitment to their success, according to sources close to the operation.

Vivendi Universal shares dropped 47 cents on Friday to close at $37.85 on the New York Stock Exchange. USA Networks shares fell 56 cents to close at $32.23 on Nasdaq.