By Ronald Grover
It has become one of the longest, weirdest corporate auctions in recent memory. For months, Paris-based Vivendi Universal Entertainment (VUE ), the entertainment arm of the French water conglomerate, has teased potential buyers, giving signals that it is looking to sell its studio, theme parks, and music company. But on July 1, after Vivendi's board met to consider six offers for the entertainment assets, bidders had little -- if any -- idea where they stood.
One of the six suitors, a group headed by Los Angeles billionaire Marvin Davis, was eliminated from the bidding. But the rules abruptly changed for the other five: Vivendi signaled that it intends to hang on to the music company, and it asked the remaining five bidders to come back with higher -- and in some cases, newly structured -- offers.
Sources say the bidders still in the auction are movie studio MGM (MGM ), General Electric's (GE ) NBC studio, media companies Viacom (VIA ) and Liberty Media (L ), and a consortium put together by former Seagram CEO Edgar Bronfman Jr., who sold the assets to Vivendi three years ago.
Each of the surviving groups will be asked to bid after getting additional information, say insiders. The price? One suitor says it's around $11.5 billion. But Vivendi isn't saying, allowing only that "a very significant competition has arisen for the assets," and that it now intends to pursue "in-depth negotiations." The highest bid is believed to be MGM's $11.2 billion offer for VUE, the holding company that contains the studio, theme parks, and cable operations like USA Network and Sci-Fi Channel.
Vivendi's new ground rules will likely set off a scramble that could alter, and perhaps undo, some of the bids. The offers by Bronfman and Liberty Media, cable dealmaker John Malone's media operation, are said to have included the music unit and will need to be restructured. NBC may also have to rejigger its offer. GE proposed a merger of assets in which it would combine Vivendi's assets with its NBC network, Bravo cable channel, and Spanish TV network Telemundo to create a media company that NBC would operate and be majority owner of.
As for Viacom, it offered only to buy the cable channels, although it left open the possibility of acquiring the studio as well. Sources say Viacom will likely not bid for the entire group of assets on its own but may seek partners to help it buy VUE.
MGM IN THE LEAD?
While Vivendi didn't return phone calls seeking comment, insiders say the French company decided against selling the music business, which bidders had been valued at around $5 billion, because Vivendi believed it could get more once concerns about digital piracy are eased. And it's still contemplating an initial public offering for VUE, Vivendi said in a briefly worded press release following the board meeting.
Complicating the process is the way its various agreements are structured. Viviendi needs to sell off the entertainment unit in its entirety to avoid hefty payments to Bronfman's family, which is still a large shareholder, or to media mogul Barry Diller, whose InterActiveCorp owns a $5.4 billion stake in VUE.
At first blush, the Vivendi board's decision seems to favor MGM's $11.2 bid, which is said to be an all-cash offer. A group that includes MGM majority shareholder Kirk Kerkorian, Morgan Stanley (MWD ), and Providence Equity Partners would contribute $2 billion. The other $9.2 billion would be arranged by BankAmerica (BAC ) and Morgan Stanley, which provided "highly confident" letters as part of MGM'S submission (see BW Online, 6/27/03, "MGM: Dark Horse in the Vivendi Derby").
At Vivendi's discretion, MGM would give Vivendi a 20% stake in the newly created company instead of $2 billion cash, say those with knowledge of the deal. MGM sources declined to comment on specifics. By Ronald Grover
ON THE REBOUND.
The rest of the bidders are now in the position of examining how much they really want VUE, which has a library of some 1,500 films, including recent hot flicks like Bruce Almighty and 2 Fast 2 Furious, a theme park in Los Angeles, and a 50% stake in the Universal Studios theme park in Orlando, Fla. Bronfman, who bought what is now VUE in 1996, hopes to get back the assets he sold to Vivendi to rebuild them and recover some of the money his family lost when debt-hobbled Vivendi cratered last year. Though a spokesman, Bronfman says he definitely intends to bid again.
VUE, however, is still Malone's to lose. His Liberty Media has been hungering for a large acquisition as it continues to remake itself from a collection of assets into an operating company that would appeal to investors. VUE certainly fits the bill. With more than $5 billion in cash on Liberty's balance sheet, he could easily finance the $11.5 billion deal, if he wanted. Still, Malone isn't fond of bidding wars. A Liberty spokesman declined to comment.
NBC and Viacom are the puzzlers. Neither would seem to have met the first criteria set by Vivendi: cash to help it pay down its steep debts. But both have cachet, and apparently Vivendi wants them around to keep the competition brisk and the other bidders interested. Then again, maybe Vivendi hopes one or the other will take a second look at the assets, love what they see, and lob in some bids that are more to the French company's liking, although that seems unlikely.
THE TWO OF US?
Viacom has made it clear it doesn't want the Universal Studio or theme parks. CBS's parent bid a steep price for the cable channels, pegged by sources at around $3 billion, but that's probably not enough for Vivendi. The cable channels are the choice assets, the ones everyone wants. Vivendi apparently asked Viacom Chairman Sumner Redstone to reconsider its bid, but Redstone isn't likely to jump into a bidding war, say those around him. "Maybe they'll stick around to see what develops, or until Vivendi kicks them out," says one well-placed source.
NBC hopes to convince Vivendi that a combination of their assets would make a strong enough company for the French to forgo cash and bet that they can sell stock down the road. GE Chairman Jeffrey Immelt is expected to meet next week with Vivendi executives to promote his outfit's bid and with the NBC management team headed by longtime network Chairman Bob Wright. But the prospect of no cash up-front isn't expected to appeal to Vivendi.
Surprises could still appear. One rumor making the rounds is that Diller will give his $2 billion in preferred shares to one of the contenders, perhaps Bronfman or Malone, to fortify their bids. Diller has said for weeks he isn't pursuing a bid but would consider anything that would enhance value for his shareholders. And the Marvin Davis group could return to the bidding, say those close to the auction. Davis' team, headed by former Universal President Brian Mulligan, is said to be huddling with a view to a new -- and presumably higher -- offer.
Perhaps that's what all this maneuvering is really about: tweaking the price for assets that recently seemed to have become more popular. Vivendi shareholders can only hope that's what's going on. Vivendi executives have said they want to complete a deal by late July. Given the long and tortuous path this auction has already taken, a resolution could end up on many a mogul's Christmas list.
Grover is BusinessWeek's Los Angeles bureau chief
Edited by Patricia O'Connell