Vivendi cash strengthens Diller's internet properties: well-funded USA Interactive could attract investors

Cable World, Jan 7, 2002 by Mavis Scanlon

In clinching a deal to sell--and run--the entertainment assets of USA Networks to French media giant Vivendi Universal while retaining control of USA's remaining interactive assets, Barry Diller has enhanced his legacy as a consummate deal maker.

It was long rumored that Diller would again run a major Hollywood studio. That rumor proved true when USA and Vivendi confirmed their deal on Dec. 17. But more investor interest may be sparked over what Diller will do in his position as chairman and CEO of the company holding USA's interactive assets.

As a result of the Vivendi transaction, USA Networks will be renamed USA Interactive and will hold all of USA Networks' assets not being bought by Vivendi, including e-commerce companies in the electronic retailing, ticketing and online travel and reservations categories. These categories represent half of the total $52 billion e-commerce market, according to USA.

Included in the stable are Home Shopping Network, Ticketmaster (whose presence in online ticketing is growing), Hotel Reservations Network, Match.com and CitySearch.com, a local listing service. USA says its flagship Internet properties are all No. 1 or 2 in their respective categories--a requisite for success when it comes to selling on the Internet and evidence to some that Diller's vision of building a transaction-based Internet empire is coming to fruition. In addition, analysts say, the Internet properties are generally growing cash at a faster clip than USA's more staid media properties.

As usual with Diller, the question remains as to what is next. He has long talked about his desire to continue acquiring Internet properties and now has a war chest of nearly $3 billion in cash to do so, including $1.6 billion in cash USA received as part of the Vivendi transaction.

So what exactly does Diller do with the Internet company?

"That's the big question," says Gordon Hodge, an analyst at Thomas Weisel Partners. "Obviously [Diller] has a tremendous track record, history and presence in the entertainment world ... Obviously interactivity is the future of media."

Diller has always talked up interactivity as being the future of media and in recent earnings conference calls has made a point of saying that the fall of many Internet companies has made for extremely good opportunities for well-funded companies.

Hodge agrees. "Interactivity is still somewhat out of favor," he says, and may surprise people with its growth opportunities. Diller has the chance to put his capital to work and said as much in discussing the deal back in December.

"The great good luck of being able to have a company in all these interactive areas, so well-funded, so strong and independent, at just the time of so much opportunity, gives us a great chance to dominate a business sector that will undoubtedly become one of the most important in the world," Diller said in a statement announcing the transaction.

As an independent entity, USA Interactive is expected to generate this year $4.3 billion in sales and $620 million in earnings before interest, taxes, depreciation and amortization. Diller retains voting control, and other big shareholders in the company, including Vivendi and John Malone's Liberty Media, will not have veto rights. USA Interactive will also own a minority stake in the joint venture being formed by Vivendi and USA.

The terms of the USA-Vivendi deal call for Vivendi and USA to form a joint venture called Vivendi Universal Entertainment, with USA contributing all of its entertainment assets. Vivendi will pay USA approximately $10.4 billion in securities and cash, including $1.6 billion in cash and $750 million full value preferred interest, for a 93% stake. USA's 5.4% stake is valued at roughly $1 billion. The deal gives Vivendi a clear path for growth in the U.S. market and will expand the content offerings for USA's networks, such as the Sci-Fi Channel and USA Network.

Once the deal closes, Diller will serve as chairman and CEO of the new subsidiary. Top management at Universal Studios will remain in place, with Universal Pictures chairman Stacey Snider and chairman and CEO of Universal Studios Recreation Group Tom Williams retaining their titles and reporting to Diller. Michael Jackson, chairman and CEO of USA Entertainment Group, is expected to assist in the integration of the merger, while Pierre Lescure, co-chief operating officer of Vivendi Universal, also retains his title and will work closely with Vivendi Universal chairman and CEO Jean-Marie Messier.