Kate Bulkley, Media Analyst.

Heart of the Matter

By Kate Bulkley

Cable & Satellite Europe

Issue 1, 01 January 2002

So far, Vivendi has confounded the sceptics...But the deal-making frenzy has increased debt, which Messier pledges to cut even though Diller says Vivendi's profile in the US needs enhancing, a hint that more deals are on the cards

Have you heard about the plans to revive the game show format in the US by hooking up contestants to heart monitors?

Although it's still unclear if it will bring in viewers, I think this would have been useful at the recent press conference announcing Vivendi Universal's purchase of the entertainment assets of USA Networks. The deal and a separate, strategic alliance with Echostar cements Vivendi's transformation into a media powerhouse, by adding a distribution platform in the US, the largest media market in the world. The Echostar deal seems straightforward: Jean-Marie Messier's $1.5bn equity stake helps Charlie Ergen fund his acquisition of DirecTV while Vivendi gets the option to launch new channels and interactive services to Echostar's subscribers.

If the DirecTV deal is approved, then Vivendi bumps its distribution potential up to 16m subs. "The deal with Echostar paves the way to worldwide satellite distribution," says Messier.

However, some are questioning if Messier, an irrepressible deal-maker, has bitten off more than he can chew. The cherubic Frenchman has spent nearly $50bn in the US alone in the last year. It started with the purchase of Seagram, the Canadian owner of Universal, and ended with Vivendi's decision to pay $10.8bn for USA Networks, which seems a pretty expensive way to gain control of some pretty quirky channels. The Sci-Fi Channel is not known for highbrow fare and USA Network's ratings have hit the mat since it lost WWF wrestling, but these two channels do have a lot of clout with US cable operators. USA Network reaches 82m US homes, and generates about $820m in annual revenues, while Sci-Fi reaches 75m homes and brings in $275m a year, say analysts. Messier sees 2002 as a year of "increasing our distribution agreements". The idea is that by putting USA Networks together with the movie studio, the TV channels will get more and better programming and the studio will have more leverage to produce better films.

The deal also brings CEO Barry Diller into the Frenchman's fold. Diller gets the plum job of overseeing both Universal Studios and Vivendi's TV assets. An entertainment industry veteran, Diller is both a visionary and a difficult man to manage. His credentials include running the Paramount Studio in the 1970s and launching the Fox Network, where he also oversaw the creation of The Simpsons.

In a major concession to his new buddy, Messier is allowing Diller to continue operating an e-commerce company separate from Vivendi Universal, which includes Home Shopping Network and Ticketmaster. This is a bit odd: with a leading position in the e-commerce space and a cash hoard of some $3bn, Diller's USA Interactive will be on the acquisition trail and could be a significant distraction.

Messier prefers to talk about Diller's "industry vision" and "outstanding track record in generating cash flow and asset value growth". But when Messier reached out for the customary handshake in front of the TV cameras at the announcement, Diller physically recoiled, saying: "Oh, we aren't going to give them that shot are we?" If only we had the new quiz-show heart monitor strapped on Messier! I bet dimes to doughnuts that his missed a beat.

The suave Parisian will certainly have his hands full with Diller - and at a time when the global outlook for growth is weak and the synergies expected from his build up of expensive assets are still someway off.

Even the most successful aggregator of media assets - AOL Time Warner - has been forced to cut its earnings growth estimates for 2002 and write off $60bn in goodwill.

So far, Vivendi has confounded the sceptics. It is one of the few media companies that did not have to issue an earnings warning last year, largely because only 5% of its revenues come from advertising. Messier says he is on track to grow revenues by 10%. But the deal-making has increased debt, which Messier pledges to cut even though Diller says Vivendi's profile in the US needs enhancing, a hint that more deals are on the cards.

But maybe Diller-watching will not be as crucial to Messier as his strategy of working with John Malone and his Liberty Media company, the leading consolidator of European cable assets. Malone - a man with a finger in almost every media pie - just happens to own a 3.5% stake in Vivendi Universal thanks to his original USA Networks holding. Where's that heart monitor now?

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