Honeymoon over for biz newlyweds

Street scenarios include AOL spinoff, Viv U breakup

NEW YORK — Shares of Vivendi Universal and AOL Time Warner have fallen far and fast, fueling rumors the media giants may consider dismantling the companies they created only recently with great fanfare and a heaping measure of hubris.

The pieces now are worth more than the whole, which has prompted Wall Streeters to suggest a spinoff of America Online and raised the question of whether Viv U would break out its valuable U.S. entertainment assets into a separate company — essentially unraveling deals that were supposed to revolutionize global media and entertainment.

Neither scenario seems likely at present — Viv U just closed Tuesday on its deal to acquire the entertainment assets of Barry Diller’s USA Networks. But the fact they’re being discussed at all is testimony to just how the economic climate has soured and investors have grown impatient with extravagant promises and half-baked corporate strategies.

Admitting failure on such a scale is a humiliating and rare, but not unheard of, reversal for a CEO. AT&T’s plunging stock forced chairman Michael Armstrong to split the company into pieces after a failed $100 billion, two-year spending spree on cable systems. He’s in the process of selling the cable biz to Comcast.

Panicky market

The market’s response to AOL TW and Viv U is part panic as well, as negative news drives a stock lower and news about the stock drop pounds it even further into the ground. Put options that are costing Vivendi millions of dollars were trigged by the stock decline. Ratings agencies downgraded Viv U’s credit (and sparked a selloff) partly because they fear the low stock price might endanger the company’s liquidity.

The numbers are shocking. AOL Time Warner boasted a combined market capitalization of $290 billion when the merger was announced, now it’s down to about $77 billion. Vivendi Universal’s market cap of $100 billion has been slashed to about $30 billion.

Vivendi shares fell 2.44% Tuesday to $27.57 — down from a 52-week high near $70. AOL stock closed at $17.26 — about flat from the day before. Its 52-week high was near $60.

America Online’s ills have dragged AOL TW stock so low that the market cap puts a zero value on the Internet service provider. Spinning the unit off into a separate company could realize at least some of that value, the logic goes.

AOL TW’s new CEO Richard Parsons, says a spinoff isn’t in the cards. America Online ejected its top exec to hand the reins to Bob Pittman.

Staying the course

At Viv U, Pierre Lescure was pushed from the helm of troubled Canal Plus, but CEO Jean-Marie Messier seems intent on weathering the storm. If the stock keeps falling, that will become increasingly difficult.

“The CEO has to take the fall,” said one Wall Streeter.

Splitting off the U.S. showbiz assets, Universal Studios and Universal Music, could provide a perch for new U Studios head Diller, while Messier returns to France to oversee the water utility and TV biz — or is replaced there by another French exec.

But people familiar with Vivendi say the company could first consider dumping the water company and even the telecom business, which still has only vague synergies with entertainment. Either way, a realignment or disposition of assets seems likely.

“The difference is AOL Time Warner has a credibility issue and an operational issue, not a strategic issue,” said one Wall Streeter. The company may not be the hallmark of corporate synergy it promised, but AOL and Time Warner can stand alone under one roof in a relationship that still makes some sense — particularly if the ad market picks up and AOL gets back on track.

Vivendi’s issues are more complex. “The idea of hitting bottom is that you can put your feet down and push off, but we keep sinking,” said one insider.