Vivendi's Bold Auctioneer

CEO Fourtou wants one buyer for the U.S. movie, music, and cable units -- but is his price too high?

It was junk, but it sure went down easy. On Apr. 3, investors snapped up $1.3 billion in junk-rated Vivendi Universal (V ) bonds. The sale marked the first time the Franco-American media group had tapped the debt markets since its credit-rating downgrade last summer. The 7-year bonds carried tasty yields of up to 9.75%. With the offering, and an estimated $9.4 billion in asset sales over the past eight months, CEO Jean-René Fourtou is well on his way to easing the cash crunch that nearly sank Vivendi last year.

Now comes the main course. Fourtou is gearing up to dispose of Vivendi's U.S. entertainment business, including such choice morsels as Universal Studios, Universal Music Group, and cable television's USA Networks and Sci-Fi Channel. His Citibank investment bankers have already talked with potential buyers including Viacom (VIA ), Liberty Media (L ), and former Twentieth Century Fox Chief Marvin Davis. Fourtou has been meeting with major Hollywood players at the Los Angeles home of Universal Studios Inc. boss Ron Meyer. "He's very smart, and he's trying to do well for his shareholders," says DreamWorks SKG partner David Geffen, who has seen Fourtou in action but isn't involved in the bidding.

But Fourtou is not just gauging appetite. He's searching for a glutton who is ready to swallow the film and TV businesses in one gulp. Selling them as a package is the only way Vivendi can avoid tax liabilities that would be triggered by splitting them up. Viacom is interested mainly in the cable holdings. Davis wants it all: the film, the TV, and the music businesses. But he and the private-equity firms he has partnered with are offering $15 billion for a roughly two-thirds stake, a long way from the $20 billion that Fourtou wants for the film and TV units alone. Fourtou, for his part, seems to be playing the bidders off each other in hopes of driving up the price. "Fourtou always seems to be moving the goal line back. It can be pretty maddening," says one executive with knowledge of the talks.

One of the ideas that has most intrigued Fourtou, insiders say, is a proposal by John C. Malone's Liberty Media Corp. to put cash and Liberty's Starz Encore Group LLC cable network into a joint venture that would also include Vivendi's TV business. But relations between Vivendi and Liberty have soured. On Mar. 28, Liberty filed a lawsuit accusing Vivendi and Fourtou's predecessor, Jean-Marie Messier, of misleading investors about the company's financial condition. Vivendi says it will contest the suit, which it contends Liberty is using to gain leverage in its talks.

At least Fourtou has bought himself some breathing room. With the recent bond offering, Vivendi now has more than enough cash on hand to cover the $2 billion in debt payments due this year. But without a major asset sale, it will come up short in 2004, when nearly $2.8 billion in debt falls due.

For now, Fourtou is keeping everyone guessing about his next move. That's not a bad negotiating strategy. But it's not good for investors or for Vivendi's share price. The stock is trading at $14.50, down 65% from a year ago and almost exactly where it was when Fourtou took over from Messier last July. Richard Wiseman, a fund manager at Insight Investment Management Ltd. in London, says he bought shares in Vivendi last year because he was impressed by the progress on debt reduction. But now, Wiseman says, "there's a perception that Vivendi has stalled a bit."

While Fourtou labors to unravel the media conglomerate that Messier knit together, his predecessor's shadow still looms large. Vivendi is under investigation by authorities in France and the U.S. for allegedly giving investors an overly rosy picture of its finances during Messier's tenure. It also faces shareholder lawsuits in both countries. The company has even had to delay the sale of the $17.5 million apartment in New York City that it bought for Messier's use. The company confirms that Messier and his family have been living there rent-free this year, while Vivendi and the ex-CEO wrangle over his severance package. Then again, Fourtou will probably have an easier time unloading a luxury Manhattan co-op than a Hollywood studio.

By Carol Matlack in Paris, with Ronald Grover in Los Angeles and David Fairlamb in Frankfurt

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