Titan or outcast? It’s all in the timing

Messier and Murdoch -- similar goals, different outcomes

NEW YORK — The story seems oddly familiar: Foreign-born media baron with voracious appetite for buying companies is driven by a single-minded vision of a seamless global empire of production and distribution. Baron gets too deep in debt and hits big cash flow problems just as economy slides into recession. Angry shareholders revolt and banks get nervous, sparking talk of a wholesale breakup of the conglom; all the while bottom-fishing barons lurk behind creditors, hungry for cheap eats.

This description of dethroned Vivendi Universal creator and CEO Jean Marie Messier could easily have applied to the king of media barons, Rupert Murdoch, over a decade ago.

Both men were deal junkies with a taste for new media businesses requiring huge startup capital (Murdoch’s expensive experiment was DTH satellite TV; Messier’s, the synergy of content and broadband). Both met some hostility in their U.S. incursions.

In another era, Messier might have been a hero, but without Murdoch’s communications skills (and a friendly board of directors), in 2002 Messier’s quirky manners and poor politics got him into trouble with employees, shareholders and, finally, the board. Admittedly, Murdoch wasn’t trying to marry content to an existing water business.

What the future holds for Messier’s compilation of communications assets is unclear, but a longer-term perspective begs a rethink on just how bad off Viv U really is.

Messier’s hyperdiversification and expansion drive was hardly unique or even any more risky financially than the roll-up orchestrated by Murdoch 12 years ago.

Murdoch at that time was on the cusp of bankruptcy and, noted one analyst, “staring into an abyss of debt and illiquidity.”

But with the imperial Murdoch at the helm, the company rescheduled $8.5 billion in debt at the 11th hour through painstaking negotiations with a syndicate of 146 banks. Several months later, News Corp. was in the clear and on the cusp of major revenue growth.

Arguably, Vivendi U now is in better shape than News Corp. was in 1990. Thanks to strong relationships with its European banks, Viv U easily solved its short-term liquidity problems with $2 billion in fresh credit lines, which should meet interest payments of $1.8 billion due at the end of this month. It also has some obvious assets to unload to ease its back-breaking $15.5 billion debt load.

But whereas News Corp. rallied the banks to keep its fledgling empire intact, Viv U is already moving into fire sale mode.

It’s not as if Messier was investing in a vacuum. Each of his deals, including the acquisitions of Universal Studios and USA Networks, had board approval.

Messier’s defenders argue that he and Viv U were victims of the economy and the short-sightedness of a market that demands immediate gratification. If Messier is guilty of anything, it is of not having a sufficiently strong management team willing to play devil’s advocate.

Part of Messier’s undoing at home was his ambiguous relationship with the French establishment. He exploited advantages like the French terrestrial pay TV license and lucrative water and environment contracts but simultaneously mocked the French cultural elite’s protectionist attitudes.

His decision to fire Canal Plus chief Pierre Lescure was strategically and financially sound, but its orchestration was politically disastrous. Would Murdoch have handled it the same way?

The primary black mark against Viv U, say peeved analysts, was Messier’s knack for not being entirely honest in his pep talks with investors.

Clearly, accusations that Viv U inflated its 2001 earnings statement by nearly $1.5 billion are serious business. But recent disclosures unearthed a few more nasties that inflate debt even more.

According to Sanford Bernstein media analyst Michael Nathanson, there’s a $900 million cost to cover put options that Viv U wrote on its own stock, plus another $1.3 billion in other contingent liabilities such as real estate sales guarantees.

The question now is: What to do with Viv U?

In a more robust climate, Viv U’s U.S. media assets could draw a cadre of suitors (G.E., Viacom, News Corp.) and fetch upward of $26 billion after taxes.

This would certainly get Viv U out of its debt hole, but it would leave little left to call a media company.

And while the rumor mill is already spewing scenarios that see Barry Diller, John Malone, Kirk Kerkorian and even Paul Allen or a wild-card entry like DreamWorks teaming up to buy Universal Studios, the likelihood of Viv U getting a suitable cash offer to justify the destruction of its core production asset is low.

The quandary for Viv U is that the studio generates little cash to fuel the rest of its expensively acquired empire.

Most of its operating free cash flow (after tax and interest expenses) of roughly $1 billion for 2002 is coming from music, publishing and environment; the studio and many of its other businesses are net consumers of cash.

Nathanson notes that “unlike News Corp. in 1990, which had a host of stations and newspapers that were simply depressed due to recession, Viv U’s assets are simply not great cash generators.”

“They definitely need to sell telecoms assets like Cegetel to de-lever the balance sheet,” says Nathanson, whereas even if they sold off all of their U.S. entertainment businesses, it wouldn’t deliver much of a dividend for shareholders.

Viv U can survive as a pure-play media content company by gradually selling off environment and telecom assets (together worth perhaps $10 billion).

For better or for worse, Messier re-created Viv U in his own image. Any disposal decisions will have to resolve what the new company looks like, and whether it will be a French firm, a media firm or a global conglom.

Some might argue whether in the end Viv U will remain a company at all.

That’s Messier’s legacy.

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