Vivendi May Shift Its Focus to Telecom

It wasn’t long ago that Vivendi Universal was on its way to transforming itself into a glitzy media-and-entertainment conglomerate that controls a Hollywood studio, theme parks and the world’s largest music company.

Now, its future may lie with a less glamorous product: the telephone.

Vivendi on Tuesday gave the clearest signal yet that it may seek to become a bigger player in the telecommunications business when executives announced that the company has lined up $1.3 billion in financing as it considers expanding its stake in Cegetel, which owns lucrative French mobile phone company SFR.

The reason for Vivendi’s apparently growing interest in telecom is clear: Cegetel, which has 16 million subscribers, has been a cash cow for Vivendi. That was underscored Tuesday when Vivendi reported that Cegetel’s operating income grew 64% to $456 million in the third quarter, accounting for one-third of Vivendi’s operating profit.

In contrast, Vivendi Universal Entertainment saw its operating income fall 30% to $220 million in the third quarter, reflecting a thinner slate of movies, declines in theme park attendance and weakness at the USA cable network. Universal Music Group’s operating income dropped 89% to $15.8 million, which the company mostly blamed on higher recording and artists’ costs.

The maneuvering for possible control of Cegetel comes as new Vivendi Chief Executive Jean-Rene Fourtou seeks to define a new future for his beleaguered company.

As recently as September, he vowed that Vivendi would remain an entertainment and media company with a sizable stake in telecom. But some analysts question whether Vivendi might in fact seek to restructure itself as primarily a telecom business that maintains a stake in entertainment and media.

Although Fourtou has until Dec. 10 to indicate whether he’ll go forward with the Cegetel purchase, “it would seem like Vivendi is going to end up being a telecom company,” said New York money manager Dennis Leibowitz.

One thing is certain, some say: Fourtou no longer has the luxury of rebuffing bids for the U.S. entertainment group such as the $13-billion offer made recently by Los Angeles mogul Marvin Davis.

“It definitely puts more pressure on Fourtou and raises the possibility of an outright sale,” said Paul Kim, an analyst with Kaufman Bros.

In a conference call with analysts Tuesday, Jacques Espinasse, Vivendi’s chief operating officer, conceded as much: “We have an obligation to look at all offers that are presented to us ....Do I think in two years’ time these assets will be ... part of [Vivendi]? I do not know.”

He stopped short of saying Vivendi had decided to increase its Cegetel stake but added that such a scenario is possible because “Vivendi Universal’s cash crisis is now over.”

The Davis offer, which came to light last week, has put the Universal assets in play and is expected to draw out offers from other potential suitors. Several parties, including NBC, Viacom Inc. and cable mogul John Malone, have in the past expressed interest in the various assets.

The Davis camp seized on Vivendi’s financial results to justify Davis’ $13-billion offer, which the Paris company has dismissed as too low.

“You have these extremely strong entertainment assets that are not being maximized, not because the people in charge aren’t good -- they are terrific -- [but] because they are part of a larger company where the focus is elsewhere,” a source close to Davis said.

Still, Fourtou has not given any indication that he wants to pull entirely out of Hollywood. In fact, Vivendi said this month that Fourtou would join Barry Diller as co-chief of a reconfigured entertainment group.

Sources close to Fourtou say he and Diller are preparing to fold the entertainment group into a separately traded company next year. There has been widespread speculation that Vivendi would be a major investor in the new company and that Diller would head it. Diller has taken steps to slash costs to prepare the businesses for a possible spinoff, studio sources say.

For now, though, Fourtou is mostly focused on Cegetel.

Vivendi, which owns 44% of the company, wants to own a majority stake so it can have access to Cegetel’s cash flow.

But Vivendi faces competition for control of Cegetel from Britain’s Vodafone, which has made an offer to buy Vivendi’s stake and that of two other owners. Vivendi has two weeks to make its own bid or accept Vodafone’s nearly $7-billion offer for Vivendi’s share in Cegetel.

Fourtou, however, probably faces pressure from fellow French board members to hold on to the successful French company, investors say.

“You have to weigh the notion that this is a French guy,” said Mario Gabelli of Gabelli Asset Management, which owns about 5 million shares. “He wants to leave his legacy in France.”

Some investors were puzzled that Fourtou didn’t immediately accept Vodafone’s offer given Vivendi’s massive debt.

That piled up during a three-year buying spree to transform a 150-year-old water utility into a global media giant by merging with Seagram Co.’s Universal properties and European television and film company Canal Plus. The acquisition binge left Vivendi on the verge of bankruptcy this summer. Since then, Fourtou has bought himself some breathing room by securing new loans and selling assets.

Vivendi further strengthened its cash position Sunday with a deal to sell its remaining 40% stake in its water utility, raising nearly $1.8 billion this year and an additional $2.1 billion by 2004. The company expects to raise $7 billion by year’s end, Espinasse said.

Studio executives say Tuesday’s results come as no surprise given that Universal Pictures released fewer movies and didn’t have a slate of blockbusters like last year, when it dominated the box office with such hits as “A Beautiful Mind” and “The Fast and the Furious.”

Universal Music Group, with artists such as Bon Jovi and Eminem, was hurt by higher recording costs and an industry sales slowdown blamed on rampant piracy on the Internet.

Overall, Vivendi reported a net loss of $1.22 billion, or $1.12 a share, in the third quarter, compared with a loss of $951 million, or 91.2 cents, a year earlier. The results included one-time costs from the sale of Boston-based publisher Houghton Mifflin Co. and Italian pay-TV company Telepiu.