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Vivendi seals USA deal
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December 17, 2001: 3:56 p.m. ET
Media giant moves in to buy remaining USA Networks stake for $10.3 billion.
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Vivendi nears USA Networks deal - Dec. 16, 2001
Vivendi may offer post for Diller - Dec. 14, 2001
Vivendi sells BSkyB stake - Dec. 13, 2001
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NEW YORK (CNN/Money) - Vivendi Universal of France Monday agreed to buy USA Networks Inc. for about $10.3 billion as the world's No. 2 entertainment company expands its distribution network in the United States.
The cash-and-stock deal would combine Vivendi's Universal film studios, which produced such hits as "How the Grinch Stole Christmas" and "Erin Brockovich," with USA, which produces the popular TV shows "Jerry Springer" and "Law and Order," and operates the USA and Sci-Fi cable channels.
The complexity of the transaction has the hallmarks of its two principal participants, Vivendi CEO Jean-Marie Messier and USA's Barry Diller.
With the USA merger, Vivendi has crossed another threshold in its climb from a French water utility to one of the world's biggest media firms under Messier's direction. Messier had been looking for a partner to ramp up U.S. distribution of its Universal film library, just a year after acquiring the studio from Seagram, in order to better compete with Walt Disney Co., Viacom (VIA: up $0.87 to $42.15, Research, Estimates) and AOL time Warner (AOL: up $0.57 to $33.55, Research, Estimates), parent of CNN/Money.com.
The deal comes as U.S. media companies are facing a sharp slowdown in advertising, which accounts for much of their revenue, amid an economic slowdown that turned into a full-blown recession following the Sept. 11 terrorist attacks.
Nevertheless, some Wall Street analysts had a favorable reaction.
"I think it definitely is a natural fit," Vinton Vickers, a media analyst at J.P. Morgan, told CNNfn's Market Call Monday. Vickers upgraded USA's stock to a "buy" rating following the announcement Monday.
"USA Networks had these entertainment assets, but they'd been in an environment that's seen a fair amount of consolidation, and Vivendi really needed to get more exposure to the U.S., so it made a lot of sense," he said.
The deal comes after Vivendi agreed last week to take a $1.5 billion equity stake in EchoStar Communications, which has agreed to buy Hughes Electronics, operator of the DirecTV Satellite television service.
Under the deal, USA Networks' (USAI: up $1.20 to $25.02, Research, Estimates) outspoken CEO, Barry Diller, will become chairman of a new company called Vivendi Universal Entertainment - a task he said he would do for no pay because he would "enjoy" it. Diller, who gets a 1.5 percent equity stake in the new company, will report to Messier.
Vivendi will finance the deal by selling a stake in USA Networks and 32 million of its shares in exchange for part of Liberty Media Corp.'s stake in USA Networks. Vivendi will pay another $1.6 billion in cash and $750 million in deferred payments, the companies said in a statement.
Part of the financing will come from proceeds of the sale two weeks ago of 9 percent of Vivendi Environment. Vivendi also sold 8 percent of British broadcaster BSkyB last week and is expected to cash in $8 billion from the sale of the beverage assets it acquired in the Seagram deal.
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Liberty Media is to sell its 27 percent stake in cable TV company Multithematiques to Vivendi Universal for 5.2 million Vivendi Universal shares. That will give Liberty a 3.6 percent stake in Vivendi and make the U.S. company Vivendi's biggest institutional shareholder.
Once the deal is completed, Vivendi (V: up $3.15 to $52.10, Research, Estimates), will have a controlling 93 percent stake in the new unit combining the Universal Studios Group and the entertainment assets of USA.
"This is the time in the U.S. entertainment industry of integration and consolidation, and putting together our entertainment assets is an obvious move for both of us. It's a natural fit," Messier told reporters during a press conference at New York's St. Regis Hotel Monday.
Diller was more blunt.
"The real connective tissue began right after Labor Day when we sat in a room a couple of blocks from here and said if we don't solve this issue...years from now people will look at us and say what dopes were you that you couldn't figure out how to get these businesses together and align yourselves for the future."
For Diller, the deal marks the culmination of consolidation that began in 1997 when Edgar Bronfman and his beverage and media firm Seagram acquired Universal Studios, and with it, a small stake in USA Networks. Struggling Seagram then merged with Vivendi in 2000, with Vivendi retaining its stake in USA Networks.
UBS Warburg media analyst Christopher Dixon said the deal marks the evolution of USA Networks, which has built a fast-growing portfolio of interactive services such as ticketing, merchandising, travel and matchmaking services on which it may now focus.
At the same time, he said USA can hand off its more mature television businesses to Vivendi, which needs the programming to fill its massive distribution and production pipeline.
"The net result is to create a smaller, faster-growing entity that is now superbly positioned to benefit from the ongoing development and expansion of the companies' unique portfolio of interactive properties," Dixon said in a research note.
The company said it does not expect antitrust clearance is necessary.
Messier and Diller acknowledged the advertising slowdown during Monday's news conference but noted the deal, along with Vivendi's new stake in EchoStar, is a means of hedging against that slowdown by broadening and boosting the company's subscriber base, which is another major source of media revenue.
The deal is expected to have an immediate effect on the bottom line, increasing Vivendi Universal's net income by $200 million and free cash flow by more than $350 million, the company said. 
From staff and wire reports
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