Next chapter for Viv
Sale of book unit puts focus on future of showbiz assets
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That's the question on the tip of Hollywood and Wall Street's collective tongue this new year, as Vivendi Universal finally shifts its full attention to the future of its entertainment assets.
The frazzled Gallic firm on Tuesday polished off the last of its announced 2002 asset disposals, selling U.S. publisher Houghton Mifflin to the investment consortium of Thomas Lee and Bain Capital for $1.28 billion in cash plus $380 million in assumed debt.
The previous week, Viv U collected Euro1.86 billion from the disposal of half of its stake (20.4% of 40.8%) in Vivendi Environnement at a nominal value of Euro22.50 per share. The company retains a call option on the remaining stake at Euro26.50.
The company also picked up $1.06 billion by selling its 10.7% stake in EchoStar Dec. 23.
With cash in hand to take control of its prized French telco Cegetel, all thoughts turn to entertainment.
These late December sales close a difficult chapter in Viv U's fast-dissolving history and paves the way for the biggest set of strategic decisions of all in the financial reorganization process: What are U studios, music, theme parks and USA Networks actually worth? How much of them should be sold off, and who are the logical buyers?
Hatchet men
CEO Jean Rene Fourtou right now looks to have two choices: a spin-off/IPO of VUE or accepting the $15 billion-$20 billion-ish private-equity backed offer spearheaded by Marvin Davis and Brian Mulligan.
Both these options will almost definitely involve Viv U keeping a minority position in U, since an outright sale within five years of having bought the assets from Seagram could trigger a massive tax bill and a multi-billion dollar payment to the Bronfman family.
Charged with righting the company for the first option, titular VUE CEO Barry Diller and his USA Interactive aide de camp Victor Kaufman are playing the hatchet men as they attempt to coax bigger margins by slashing costs at the studio.
But the hatchet men from minority shareholder USAI certainly have their work cut out for them.
On the studio side, Universal will this year finish the year in sixth place overall among film distribs, with roughly 9.6% of box office (or $866 million). That's down from an eight-year high of 14.5% achieved in 2000, when Viv bought U. It's been downhill since then, though its top titles have generated far more cash than in the past.
In 2001, says Sanford Bernstein analyst Michael Nathanson, U's top five films averaged $169 million per title, compared to only $57 million per title in 1998. But a weaker release slate in 2002, led by top grossers "The Bourne Identity," "8 Mile" and "Red Dragon" pulled that average down 30% to $112 million per title.
But U's thin 2002 release slate may prove even more painful next year, when homevideo/DVD sales -- which in the fourth quarter of the preceding year accounted for 66% of total studio revenues -- will likely follow the studio's downward trend in b.o. fortunes.
Also, the studio is getting more cautious with its 2003 releases, choosing to sell off rights for bigger titles such as "Sea Biscuit" (Spy Glass has international rights) and Jim Carrey-starrer "Bruce Almighty."
Overall, studio assets (including theme parks) could be worth anywhere from $5 billion to $7 billion, depending on how sucessful the accountants are at sprucing up the books.
Facing the music
The thorniest part of the VUE activities is music, where operating profits fell a heart-stopping 91% in the third quarter, despite the fact that Universal Music has been growing ahead of the music industry as a whole.
If the sector continues to contract along with its operating margins, cash flow (earnings before interest and tax payments) from U's music unit could slip to $472 million next year, according to Bernstein forecasts.
The label will be helped by a late-in-the-year Shania Twain rally (her album sold an impressive 900,000 units in its first week) that will keep its margins ahead of rival record companies.
Still, its rising share of a declining market will keep the music unit on its own off any imminent auction block. Viv U's stake in the business is worth roughly $5 billion based on current trading multiples of comparable firms like EMI.
A shrinking net?
USA Network could attract the biggest price tag of all, given the recent enthusiasm among several buyers for prime cable programming real estate.
The general entertainment cabler will this year generate some $1.84 billion in sales and $523 million in profit. That before-tax profit is considerably higher than the $464 million that U Studios should record for 2002, with only a fraction of the revenue level.
But research by Sanford Bernstein analyst Tom Wolzien points out that even while USA Network's addressable universe grew 13% on the back of rising multichannel penetration, its household viewing actually declined 23% over the past three years (though it made some modest gains in the last 12 months). That makes it the fifth largest decliner in Wolzien's popularity index.
Viacom chief Mel Karamzin underscored these same concerns about general entertainment cable channels in a fragmented viewing market when he dismissed any interest in bidding for USA should Viv U tender it for sale.
Karmazin and others seem far more interested in USA's smaller net, the Sci Fi Channel, which was the 11th fastest growing cabler in 2002. Sanford Bernstein nevertheless reckons Viv U's stake in USA Networks to be worth around Euro 7 billion.
(Tobias Grey in Paris contributed to this report).
