Vivendi seals USA deal

December 17, 2001 Posted: 1726 GMT

NEW YORK (CNN/Money) -- French media conglomerate Vivendi Universal on Monday agreed to buy USA Networks Inc. for about $10.3 billion in cash and stock as the world's No. 2 entertainment company expands its distribution network in the United States.

Under the deal, USA Networks' (USAI: up $0.74 to $24.56, Research, Estimates) outspoken CEO, Barry Diller, will become chairman of a specially created 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 Vivendi's CEO, Jean-Marie Messier.

Once the deal is completed, Vivendi, which is selling the $7 billion in USA stock it already owns to help finance the deal, will have a controlling 93 percent stake in the new unit combining the Universal Studios Group and the entertainment assets of USA.

"This is a 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 feat," 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."

The merger provides Vivendi wider U.S. distribution through USA Networks' assets, including the USA network and Sci-Fi Channel on cable. That means reaching more viewers with such popular Universal films as "How the Grinch Stole Christmas" and "Erin Brockovich," the company said.

Analysts also appeared happy with the deal.

"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.

"I think USA Networks was in this position where they 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 the way the two companies came together the way that they did."

UBS Warburg media analyst Christopher Dixon said in a research note Monday that 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.

"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.

Under the transaction, Vivendi Universal (V: up $3.35 to $52.30, Research, Estimates) said it would pay $7 billion in USA stock it already owns, $1.65 billion in Vivendi treasury stock and $1.62 billion in cash for the stake it does not already own in USA Networks, whose assets include cable channels, the USA Network and USA's television production unit.

Messier said the deal values USA's assets at 16-18 times earnings before interest, taxes, depreciation and amortization.

The company said it does not expect antitrust clearance is necessary.

Vivendi also struck a strategic partnership Friday with EchoStar Communications, which operates the DirecTV satellite television service.

The merger 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.

Messier and Diller acknowledged the advertising slowdown during Monday's press conference but noted the deal, along with Vivendi's new 10% stake in EchoStar, is a means of hedging against that slowdown by broadening and boosting the company's subscriber base, which is the other major source of media revenue.

"Our strategy is clearly coming together," Messier said in a statement. "Along with our strategic partnership with EchoStar, this transaction fully addresses Vivendi Universal's needs in terms of integration and distribution on the U.S. market."

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.