Diller’s USA Interactive Sues Vivendi

The rancor between Barry Diller and former partner Vivendi Universal escalated Tuesday as the media mogul’s company filed a lawsuit accusing the entertainment giant of reneging on an agreement to pay taxes.

The unusual action comes nearly one month after Diller stepped down from his temporary position as chairman of Vivendi Universal Entertainment, the joint venture created last year when Diller sold his USA entertainment holdings to Vivendi in a deal valued at about $11 billion.

The lawsuit by Diller’s USA Interactive further complicates Vivendi Chief Executive Jean-Rene Fourtou’s efforts to sell Vivendi’s holdings to improve its balance sheet, analysts said.

“We were operating under the assumption that this was not a problem,” said Michael Nathanson, an analyst with Sanford C. Bernstein & Co. “It could slow any deal because you want clarity if you’re the buyer.”

Vivendi Universal declined to comment.

The dispute with USA also follows another legal fight for Vivendi, coincidentally with Diller’s longtime partner Liberty Media Corp. Liberty recently accused Vivendi of hiding its financial crisis to entice Liberty into becoming a major stakeholder in the French company before its stock crashed last year. Vivendi denied wrongdoing.

Last year, many speculated that Diller and Liberty Chairman John Malone would team to buy Vivendi’s U.S. entertainment assets. Though Malone remains a serious suitor, Diller’s interest is said to have cooled.

Still, the timing of the two lawsuits led some analysts to speculate that Diller may join Malone in a possible bid for the Universal movie, theme park and television holdings. “It could be an effort by Diller to help his buddy Malone or slow down the wheels of the disposals,” Nathanson said.

But others say that’s unlikely, noting that Diller resigned last month amid pressure from USA investors to focus on his electronic commerce businesses.

Larry Haverty, money manager with State Street Research & Management Co., said Diller’s lawsuit is simply a sign of his desire to protect the interests of USA’s shareholders.

USA’s lawsuit, filed in Delaware, came after months of wrangling. USA claims that Vivendi breached an agreement to cover tax liabilities stemming from $2.5 billion worth of preferred shares USA received in Vivendi Universal Entertainment last year. USA contends the tax liabilities are valued at about $620 million.

The complaint alleges that Vivendi executives changed their minds about covering the taxes after the company’s finances deteriorated under the watch of former CEO Jean-Marie Messier. Messier later was ousted.

“Vivendi’s refusal to honor the clear commitment it made under the Messier regime is a classic case of buyer’s remorse,” the suit stated.

Seeking to reinforce its control, USA Interactive on Tuesday outlined in a filing with the Securities and Exchange Commission the restrictions it holds on the disposal of the Universal assets, including tax clauses that could cost Vivendi hundreds of millions in capital gains taxes.

USA holds a 5.4% equity stake in Vivendi Universal Entertainment. Diller has a 1.5% ownership interest.