Diller a Factor in Universal Auction

Vivendi Universal hasn’t seen the last of Barry Diller.

When Diller resigned as chairman of Vivendi’s U.S. entertainment unit earlier this year, some predicted that eventually he would return as a bidder for the Universal movie studio, theme parks and cable operations up for auction. Although that hasn’t happened, the 61-year-old Hollywood mogul nonetheless continues to loom large over the closely watched proceedings as the French media giant moves closer this week to a sale or merger.

As part of a complex and lucrative deal that Diller reached with Vivendi last year, his New York-based e-commerce company InterActiveCorp holds a host of rights and restrictions that limit what any buyer can do with the Universal assets. In addition, in the event of a sale, Vivendi could be contractually forced to pay at least $1 billion to satisfy Diller and InterActive.

“Diller could be a thorn in many people’s eyes,” said Drew Borst, an analyst with Sanford C. Bernstein & Co. in New York.

How to deal with Diller is among the vexing issues facing Vivendi as it seeks to strike a deal with the NBC television network, which is owned by General Electric Co. Sources close to Vivendi and investment bankers say the network is the favored candidate to acquire Universal, although Vivendi’s board also is expected to weigh a cash-rich offer by Vivendi Vice Chairman Edgar Bronfman Jr. at a pivotal meeting Tuesday in Paris. Vivendi also has received an offer for the assets from John Malone’s Liberty Media Corp.

To make its case to the board, GE sent a letter to Vivendi on Saturday outlining a proposal to merge its broadcast network and cable channels with Universal’s TV and film group, said a source familiar with the proposal. Vivendi would have about a 25% stake in the combined operation, with guarantees that it could cash out its stake over time. Vivendi also would have the ability to borrow against those pledges so that it could get upfront cash, the source said.

Although NBC has the upper hand, there are several potential hurdles, including GE’s reluctance to put any cash or stock into a deal as well as federal rules that limit foreign ownership of a U.S. broadcaster.

Diller’s contractual ties to Universal further complicate Vivendi’s negotiations with any buyer, but especially NBC. The network is said to want a deal without any liabilities or restrictions that would hamper its ability to integrate the Universal assets with its broadcast network and cable channels.

“It’s an issue that’s still floating out there,” said a source familiar with the talks. “No [potential buyer] wants those issues unresolved.”

Vivendi representatives declined to comment.

Sources close to the company, however, say that InterActive’s rights have been exaggerated by Diller and that Vivendi needs only to put up a letter of credit to secure part of Diller’s preferred interests in the Universal operation valued at $750 million, according to regulatory filings. Some bidders also have suggested that there are ways of structuring a deal that wouldn’t trigger any of the onerous restrictions.

Even so, Vivendi may still have to buy out Diller if it wants to strike a deal with NBC, or anyone else, analysts and company insiders say.

“I just don’t see how you do a clean transaction for a company as buttoned-down as GE ... without cleaning up Barry,” one investor close to Diller said. “It’s a big issue.”

Although estimates vary widely, settling with Diller and his company will be costly for Vivendi, which has decided to factor the liabilities into its asking price of $14 billion, sources say.

Many bidders have balked at the amount as unrealistically high for the assets.

Sources close to Vivendi put the cost of settling with Diller and his company at about $1 billion.

Diller, however, has indicated a much higher price tag. In a statement issued Friday, InterActive said it was not part of any offer or deal but would consider any opportunity worth more than “the $2.4 billion that Vivendi owes us.”

That amount represents the value of InterActive’s equity in Universal. Diller has declined to comment.

Diller secured such rights as part of a deal he reached with former Vivendi Chief Executive Jean-Marie Messier, whose plans to create a rival to media giant AOL Time Warner Inc. baffled investors and left the company with more than $30 billion in debt that has led to the auction of Universal’s entertainment assets.

Diller’s deal with Messier, finalized in May 2002, created Vivendi Universal Entertainment, a joint venture between Diller’s former USA Entertainment Networks and Universal, reuniting the studio with the USA film and TV assets it had owned previously.

The sale marked a dramatic return to Hollywood for Diller, who has been a force in town since his days running Paramount Studios and then Twentieth Century Fox, creating the Fox Broadcasting Network.

It also underscored his reputation as a skillful negotiator.

The $11-billion deal was a windfall for USA (now InterActive). Most analysts value the assets Diller sold to Universal at about $5 billion. InterActive received a 5.4% ownership interest in the joint venture as well as preferred interests valued at more than $2 billion.

Diller, who was appointed chairman of Vivendi Universal Entertainment, also profited handsomely, receiving a 1.5% interest in the entity and a guarantee from Vivendi to buy back his stake for a minimum of $275 million.

To protect his company’s investment, Diller obtained several key covenants from Messier, who agreed to such stipulations because he never anticipated Vivendi would be selling the assets so soon after purchasing them.

Among them:

That Vivendi cannot sell any of the group’s assets without either getting InterActive’s consent or posting a letter of credit to secure payment for part of InterActive’s preferred interests, based on their value at the end of 20 years. InterActive claims this value at about $2 billion.

In addition, the partnership cannot incur more than $800 million in debt at any one time and cannot sell individual assets such as theme parks without triggering hefty tax penalties. That could be a problem for NBC, which is said to have little appetite for the high-capital theme park business and would be expected to sell the unit to another buyer.

Vivendi tried unsuccessfully this year to work out a deal with Diller that would allow the partnership to be broken up so assets could be sold piecemeal. Ill feelings between Diller and new Vivendi chief Jean-Rene Fourtou deepened in April when InterActive accused Vivendi of not paying $620 million in taxes from the partnership that it had promised. Sources within Vivendi say the two sides have yet to resume negotiations.

There has been speculation that Diller might team up with Liberty or Viacom Inc. to buy some of the Universal assets, but investors say that’s unlikely because Diller is focused on his burgeoning e-commerce business, which includes Ticketmaster, Hotels.com and the online travel business Expedia.

“He just wants to get his money back,” said Dennis Leibowitz, a money manager with Act II Partners, an investor in InterActive, “and if he can extract a price for that, he will.”

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Times staff writers Meg James and Sallie Hofmeister contributed to this report.