By Ronald Grover At first glance, the auction of Vivendi Universal's Hollywood assets looks like a race on a treadmill: plenty of movement, but everyone ends up pretty much where they started.
Indeed, six weeks after Vivendi (V) formally invited bids for Vivendi Universal Entertainment -- the Universal film and TV studio, theme parks, and cable channels -- even the companies involved in the bidding say they have no idea if the French conglomerate really intends to sell the assets. And with movie studio MGM (MGM) pulling out on July 29 after Vivendi upped its asking price, the muddled mess now has even less clarity.
Look a little closer, though. While the common wisdom is that this is still a four-horse race involving John Malone's Liberty Media (L), Viacom (VIA), General Electric's (GE) NBC network, and a consortium headed by Vivendi Vice-Chairman Edgar Bronfman Jr., a growing number of folks inside the bidding think the process was little more than a mating dance, with NBC as the intended all along.
DITCHING THE MIDDLEMAN. Combining NBC and Vivendi's Hollywood holdings, as NBC has proposed, makes a lot of sense. The GE unit is the only TV network without its own film studio. In recent years, it has bulked up by buying other TV assets, including the Bravo cable channel and the Telemundo Spanish-language network. Those would make for a nice fit with Universal's current hottest assets: its USA, Sci-Fi, and Trio cable channels. On top of that, Universal makes the three Law & Order shows that are among NBC's highest-rated programs.
Put Vivendi Universal and NBC together, and voila!: You cut costs by consolidating the cable operations, and you have a TV studio whose programs can be aired on network TV and then shown again on NBC-owned cable stations. Vivendi declined to respond to several phone calls for this article.
The issue, of course, is price. But from the auction's outset, GE has seemingly been allowed to play by a different set of rules than the other bidders. When Vivendi first called for bids, looking for cash to pay down its $16 billion in debt, NBC offered a merger proposal that would give Vivendi a share in the venture -- and a vague promise of a payout down the road.
STRONG COMBO. Vivendi seems to want to get as close to a $14 billion bid as it can -- considerably higher than the $11.5 billion figure first tossed around. The higher pricetag sent MGM running -- and is probably more than any of the remaining bidders want to pay. But with a little accounting finesse, the NBC deal could get Vivendi nearly there.
How? Assuming the fairly standard valuation of an entertainment company at 14 times its cash flow, the figuring could go something like this: NBC -- which according to GE generated $1.6 billion in cash flow last year -- would be valued at about $22 billion. Vivendi's cash-intensive theme parks and riskier studios carry lower multiples, perhaps 10 times. So Vivendi could value the $1.4 billion its Hollywood assets generated last year at closer to $14 billion. With the combined venture worth $36 billion, Vivendi's stake would be worth some 40%.
NBC declines to comment on the specifics of its offer. But in a recent interview with industry publication Television Week, Chairman Bob Wright hinted that he's offering Vivendi the chance to be part of a large, powerful media company rather than take a quick payout. The company NBC proposes, he says, "would be stronger than [Vivendi is by itself], it would be stronger than with any of the other bidders."
"NO TRUST." Is that good enough for the French? Vivendi has shareholders back home clamoring for a quick and lucrative deal to pay off some of the debt run up by former Chairman Jean-Marie Messier. Moreover, NBC has some of the most seasoned management in the media world. Wright, who joined NBC in 1986, is the longest-serving president of a TV network in history. As a one-time president of Cox Communications (COX), he knows cable, and he used to run GE's financial-services division.
Perhaps most important, Wright has assembled a deep bench of executives schooled in the exalted GE way of doing business -- a style that naturally would appeal to utility-company executives from Paris. Those involved in the bidding say current Vivendi CEO Jean-Rene Fourtou can barely hide his contempt for the flashy media guys involved with most of the rest of the bidding. "He can't stand us," says one source involved with a bidder. "There is no trust there at all."
MGM is out, and there's ample reason to question the staying power of the rest of the field, especially now that Vivendi is looking for more money. It already eliminated one early bidder, a group headed by Los Angeles billionaire Marvin Davis, for offering too little.
NEXT STAGE. Malone's Liberty Media, which is spending $7.9 billion for a 57% stake in shopping channel QVC, may also be out soon. Viacom says it wants only the Vivendi cable channels, raising the question of what would happen to the other assets. And Bronfman's consortium could prove fragile, since the largest partner is Cablevision (CVC), run by the mercurial Dolan father-son team.
There have been strong hints recently that Vivendi and NBC are moving toward one another. Sources close to the deal say NBC has also offered to have the joint venture assume some of Vivendi's debt. And NBC has offered several ways for Vivendi to cash out later, including an initial public offering or a block of GE stock.
Plenty of things can still go wrong with a Vivendi-NBC match. Malone may decide he wants to step up and offer more money, but that's doubtful. And persistent rumors say media mogul Barry Diller, whose InteractiveCorp. (IACIW) owns a 5.4% stake of Vivendi's Hollywood assets, wants to join forces with Viacom's Sumner Redstone to make a bid. Last week, cable giant Comcast (CMCSA) also expressed some interest, but CEO Brian Roberts is a notoriously tightfisted guy who isn't likely to get into a bidding war.
The Vivendi auction enters its next stage on Aug. 15. The French company has said that's when it will take new bids from the players and narrow its list to two bidders, with a decision likely by September. I'm not sure who'll offer bids. But I am pretty sure a peacock will still be pecking around. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online