French Fiasco

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Edgar Bronfman Jr. attends the Vivendi board of director's meeting

In bringing an explosive end to his career as CEO of the Franco-American media giant Vivendi, Jean-Marie Messier managed a rare feat in the world of global business. He combined Gallic intransigence with Yankee arrogance to infuriate shareholders and employees on both sides of the Atlantic. The French hated him for selling out their culture, acting like a foreign mogul and moving to New York City. North Americans hated him for losing money and refusing to concede that his strategy had faltered. Even as the company's stock price descended to new lows, he spoke of running Vivendi "for another 15 years." It was more like another 15 minutes.

Messier was forced to resign when French board members joined the biggest North American shareholders — the Bronfman family, led by Vivendi vice chairman Edgar Bronfman Jr.--in concluding that French business honor (not to mention Bronfman billions) could be redeemed only by bringing on a new boss. Jean-Rene Fourtou, a well-respected pharmaceuticals- industry veteran, is now in charge.

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In Vivendi, Messier created a complex media waterworks from what was once a simple French water utility, acquiring a hodgepodge of cross-border assets, from phone companies to film studios, that at some point were supposed to connect seamlessly and gush money. But he was late to the Big Media theory. Firms like Disney, AOL Time Warner, News Corp. and Viacom had already spent billions connecting content with distribution. To catch up, Messier became a serial acquirer, buying the Bronfmans' Seagram Co. and its Universal movie studio, theme parks and music group for $34 billion in stock. Last year, in the U.S. alone, he agreed to buy book publisher Houghton Mifflin, music website, a 10% stake in the EchoStar satellite service, and the entertainment assets of Barry Diller's USA Networks for a total of $14.4 billion.

It may now be Vivendi's turn to lead, in what some predict will be a cycle of disaggregation among media companies — if not much of corporate America. Shares in media concerns have been eviscerated by an advertising recession, high debt loads and, in AOL Time Warner's case (down 55% this year), slowing Internet subscriber growth. AOL Time Warner shares have also been hit by investor aversion to companies with complex accounting stories, in the wake of bookkeeping scandals at WorldCom, Qwest and Adelphia Communications.

Fourtou, backed by French Establishment businessmen such as the AXA insurance firm's Claude Bebear, said Vivendi's future will be sorted out over the next three months. The stock rallied in response, but the company is $18 billion in debt, has no clear strategy and may need $5.8 billion to cover debts and contingent liabilities this year. Though Vivendi reported revenues of $56 billion last year, it also recorded the largest corporate loss in French history — about $12 billion — caused mainly by writing down the value of assets. Vivendi's stock fell 85% from its peak before Messier was booted. Fourtou "is going to have to turn Vivendi into a smaller and, above all, clearer company," says Marc Touati, chief economist for Natexis-Banques Populaires in Paris. "That will involve straightening out the books so investors can see exactly where things stand." It might also mean setting Vivendi's U.S. assets loose, possibly into the hands of Diller, who has already profited mightily in dealmaking with Messier and Bronfman.

The free fall in the share price began last fall as investors, burned by Enron, became increasingly wary of Vivendi's complex accounting and unfocused strategy. In the spring, Messier survived an attempt to oust him led by the Bronfmans, whose 5.5% stake had withered under Messier from $3 billion in value to less than $1 billion (see accompanying story). By last week, Messier had lost the support of key French allies and was voted out.

Vivendi's pieces may now be worth more than the whole company. If all its businesses were sold individually, the sum of the parts could fetch upwards of $55 billion, according to Michael Nathanson, an analyst at Sanford C. Bernstein, compared with a recent whole-company market value of $17.4 billion. Vivendi's 44% stake in Cegetel, France's second largest phone company, is worth an estimated $5 billion to $7 billion. Analysts say Vivendi is considering selling Canal+, France's much beloved, money-losing pay-TV operation, for at least $5 billion. Universal's movie studio, theme parks and music business (the world's largest) could bring about $17 billion, and USA Networks' cable channels and TV studio might fetch an additional $7.4 billion.

The problem is that many potential buyers are in no shape to pursue Vivendi's assets. Germany's largest TV broadcaster, Kirch Group, is kaput, bankrupt; Rupert Murdoch's News Corp. is negotiating with Vivendi about buying its troubled Italian pay-TV operation for $1 billion, and analysts say it has little appetite for more Vivendi assets; AOL and Disney, with sagging share prices, aren't in a position to use their equity for currency. Investor sentiment, moreover, has shifted away from the big merger. "Media companies are going to have to retrench," says analyst Peter Mirsky of SG Cowen. "Investors want to see clean stories, clean balance sheets, clean cash flows and a focus on the basics."

pagebreak The most talked-about scenario — though far from certain — has Diller somehow taking over Vivendi's U.S. entertainment assets. Diller, 60, is a central-casting media mogul beloved on Wall Street for creating shareholder value. Also, he took Messier and Edgar Bronfman Jr. to the cleaners last year when he sold USA Networks to Vivendi for $10.3 billion; he had bought the assets from Seagram for less than half that amount in 1998. As part of the deal, he was personally guaranteed at least $275 million to oversee Vivendi's film and TV assets, consolidated in an entity called Vivendi Universal Entertainment. By most accounts, Diller has not imposed major changes, and he has repeatedly said he has no interest in taking over the whole company. The firm's French directors would probably prevent it, on nationalistic grounds.

So how would Dillervision work? One scenario posits that Vivendi's American entertainment assets are spun off into a new publicly traded company, with Diller at the helm. That would eliminate the Franco-American culture clash. And investors would probably react favorably to having a proven hand such as Diller's steer the company. Diller clearly relishes the limelight that comes with being a Hollywood chieftain, but it would mean he would have to work once more with the Bronfman family-- an unlikely development. "I doubt Barry would work for Edgar Jr. again," says a Hollywood insider. "Barry has always been a hands-on manager, and it's always bothered him how CEOs at some point lose control making movies." Diller wouldn't comment.

Diller has his own company to run-- USA Interactive (USAI), one of the few dotcoms to emerge intact from the crash. Says analyst Peter Mirsky: "They say some people find God. It seems Diller has found Warren Buffett. In the past few months he has been talking about cash returns, clean balance sheets and going back to the basics." Diller sold USA's cable and TV assets to Vivendi precisely to get out of the entertainment business. He has said he intends to spend $9 billion bolstering USA's e-commerce sector. He is planning to buy out minority shareholders of Ticketmaster and websites and For Diller to merge Vivendi's assets with USAI's would mean a sharp strategy reversal. Nor would USAI's investors want Diller to become CEO of two large companies. "Diller is sitting on a powerhouse of assets [at USAI], and his impetus should be there," says Larry Haverty, a money manager with State Street Research, a Boston money-management firm that holds several million dollars' worth of shares in USAI.

The dismaying fact for Vivendi stockholders is that several of the firm's businesses are doing just fine. Cegetel's wireless subsidiary, SFR, is growing rapidly and last year earned about $1.8 billion before taxes and other charges. Universal Music Group, run by chairman Doug Morris, has managed to gain market share amid an industry downturn. The theme parks, with new expansions in Japan and Spain, are recovering from the post-Sept. 11 travel slowdown. And Universal's movie studio is in much better shape than when Vivendi bought it. After a stellar 2001, Universal has had a mediocre record this year. But that's the nature of the business, says Jeffrey Katzenberg, a co-founder of DreamWorks, which has a distribution deal with Universal. "Nobody is ever able to sustain record-setting paces year in and year out," he says. "Without question, [Universal] is one of the best-run studios in town."

Messier's defenders say he is a victim of bad timing more than bad strategy. Signs of Vivendi's synergies are just now emerging, they say, and a few years from now companies that control both media content and the digital means to deliver it will be making fat profits. That would help Messier, who was trying to persuade Vivendi's board to pay off $25 million in loans he had taken out to buy Vivendi shares, now worth a fraction of what they cost him. He also asked the board for at least two years' salary in severance, worth more than $14 million. In his autobiography,, Messier criticized other CEOs for taking golden parachutes. Clearly, he never anticipated being thrown off his own plane.