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Los Angeles Times

June 23, 2003 Monday Home Edition

Over the years, cable titan John Malone has invested in media properties of all stripes. His Liberty Media Corp. has held interests in radio stations, Spanish-language television, satellite TV, cable systems, cable programming, postproduction studios, Internet companies and new technologies.

He has typically steered clear of Hollywood, however, turned off by the unpredictable returns of the movie business.

That is, until now.

Malone is emerging as a front-runner in the bidding contest for Vivendi Universal's entertainment assets, according to people close to the situation, including some rival bidders. Initial offers are due today (Monday) for the assets, which include cable channels, theme parks, the world's largest music operation and the legendary television and movie studio built by Hollywood mogul Lew Wasserman.

Malone is still not enamored of Hollywood. But after a decade-long media consolidation, there is little of substance left to buy, and Malone needs to get bigger to keep from becoming further marginalized by the giants that tower over Liberty and dominate the business, analysts say.

Though Liberty's portfolio is valued on Wall Street at more than $30 billion, it controls and operates only one major asset, worth roughly $5 billion — the Starz Encore movie channels. Most of its other holdings are minority stakes in companies including News Corp., AOL Time Warner Inc., QVC, Discovery Communications and Barry Diller's USA Interactive, which is changing its name to InterActiveCorp.

Malone "wants back in the game and realizes there are not a lot of assets of any importance to buy," said one person close to the Denver entrepreneur.

Through Liberty, Malone has the financial wherewithal to do a deal without outside investors. Wall Street sources say that gives him an advantage over two of the five rival bidders: the investment groups led by billionaire Marvin Davis and Seagram Co. heir Edgar Bronfman Jr.

The other three bidders — Metro-Goldwyn-Mayer, Viacom Inc. and General Electric Co.'s NBC — also are handicapped because they either want only a few of the assets, are halfhearted in their offers or have questionable financial strength, these sources say.

"Liberty has the strongest balance sheet in the media industry," said Derek Baine, an analyst at Kagan World Media in Carmel.

Sources say Malone is making a cash bid of as much as $14 billion for Universal's entertainment assets, except Universal Music Group, which the French are looking to keep.

Besides money, Malone brings a reputation as a media maverick and one of the most astute deal makers of his time, which is important because the financially ailing French conglomerate would like to retain an equity stake in the Universal assets. Selling at a time when many media properties are trading at relative lows, Vivendi is hoping an eventual appreciation in value will compensate for what is essentially a distress sale.

Buying the Universal assets, however, would hardly establish Liberty as an A-list player.

Liberty would continue to lack a broadcast network, cable systems or a satellite outlet that are necessary to wield negotiating power in the big leagues. And Liberty's operating assets would be dwarfed by Comcast Corp., Viacom and Walt Disney Co.

That's why the Universal deal is seen by many as Stage 1.

"This is the first step in turning Liberty into an operating company," Baine said. "He could use his balance sheet to make other acquisitions."

Among Malone's long-term plans is to gain operational control of other assets within the Liberty fold, sources say. Those could include Court TV, its 50-50 joint venture with AOL Time Warner, or Discovery Communications, the powerful cable programmer co-owned with Advance/Newhouse and Cox Communications Inc.

Owning a stable of cable channels is desirable because of the cost savings from eliminating redundancies in marketing, sales and back office operations. It also provides leverage in negotiating with cable operators.

Given the assets in his portfolio, Malone might be able to work any number of trades with his partners in exchange for operating control. Cox, for instance, has said it would consider selling its 25 percent stake in Discovery if it could swap for another asset such as cable systems. Malone could also offer his partners stock in Liberty in exchange for their shares in the channels, sources close to him say.

"Liberty has also hinted at a deal with DreamWorks that could save on overhead and bring other economies of scale," Baine said.

Under one such scenario, Malone would merge Universal and DreamWorks SKG and draw on DreamWorks partner Jeffrey Katzenberg to run the new operation.

DreamWorks, however, has dismissed such speculation.

After a dramatic decline in Liberty's stock last year, Malone hatched a new strategy: to convert from an investment portfolio to an operating company, taking controlling positions that would allow Liberty to better steer its destiny.

In preparation for a year of heavy deal making, Malone has been streamlining Liberty and exiting non-core investments to amass a cash hoard. Merrill Lynch estimates that Liberty has about $2.5 billion in cash and the ability to instantly raise more than $10 billion.

A deal with Vivendi would give Liberty operating control of assets worth about $20 billion. It would also ensure movie titles for Starz at a time when studios are driving harder bargains. And it would keep Liberty from being regulated as a mutual fund because of its preponderance of minority stakes.

Even fellow bidders say Malone's bid, combined with his track record, could make him a favorite at Vivendi headquarters, especially when compared with the alternatives.

Liberty's bid is simpler than the offers from Bronfman and Davis, each of which depends on several equity partners. And many question MGM's ability to pull off such a large deal.

Viacom could be hurt because it wants only the cable channels and Vivendi could face serious tax consequences if it does not sell the entertainment assets, excluding the music operation, in a single transaction.

The wild card, some say, is NBC.

Sources say one scenario considered by GE would involve spinning off its NBC unit into a new company. Vivendi would then merge its entertainment assets into NBC and retain a stake in the new firm.

Wall Street sources say the partnership could be attractive depending on how the pieces are valued because it would create a vertically integrated media giant that, like AOL Time Warner, Viacom and News Corp., marries production factories with distribution outlets. Under this scenario, NBC and Universal would own two broadcast networks — NBC and Telemundo — as well as TV stations, production studios, theme parks, and six cable channels: Bravo, CNBC, MSNBC, USA Network, the Sci Fi Channel and Trio.

"The ideal buyer is NBC," one investment banker said. "I just don't know whether GE has the will to go through with such a transforming transaction."

As a result, many believe the odds are on Malone. "Vivendi wants cash and wants out," one Wall Street source said. "Malone is their best option."

Vivendi's six suitors

French media giant Vivendi Universal expects six bidders to meet the deadline to submit offers for its U.S. entertainment properties, which include Universal Studios, theme parks, cable channels and the world's largest music company. Combined, the assets are valued at about $16 billion, excluding debt. A look at the interested parties:

Likely bidder: General Electric Co.'s NBC What they want: Universal's cable assets and the movie studio.

Why they want it: To control the lucrative 'Law & Order' franchise produced by Universal Television. Would also put NBC on more equal footing with rivals that own both major production studios and libraries as well as distribution outlets.

Likely bidder: Liberty Media Corp.

What they want: Chiefly interested in Universal's cable assets and the movie studio. Uninterested in the music division.

Why they want it: Would secure film titles for Starz Encore Cable Group and allow the company to become a bigger media player.

Likely bidder: Metro-Goldwyn-Mayer Inc.

What they want: All assets other than music.

Why they want it: Would give MGM the bulk it needs to compete.

Likely bidder: Oil tycoon Marvin Davis

What they want: Davis has already bid $13 billion for a controlling stake in the Universal assets.

He wants all the assets. Why they want it: The onetime owner of 20th Century Fox Film Corp. wants back into Hollywood and believes he can make the units far more profitable.

Likely bidder: Viacom Inc.

What they want: Universal's cable assets, particularly the Sci Fi Channel.

Why they want it: Would provide an outlet for its vast library, and provide a platform for its popular 'Star Trek' franchise.

Likely bidder: Vivendi Vice Chairman Edgar Bronfman Jr. partnering up with Cablevision Systems Corp.

All the assets, including music.

Why they want it: The Seagram Co. heir wants to buy back the assets that once belonged to his family and restore his clan's wealth.

Sources: Company reports, Times research