No Labor Day Break for VUE Bidders

The Labor Day weekend was shaping up to be a lot more laborious than NBC and General Electric executives had anticipated, as the slow pace of the company's chase for Vivendi Universal Entertainment abruptly shifted gears.

Early last week, Vivendi executives cautioned that they might spend a month evaluating the two remaining suitors. But by week's end, NBC CEO Bob Wright had cut short a vacation and returned to New York, and dealmakers at parent company General Electric were expecting to be working the deal with Vivendi's lawyers and investment bankers over the weekend.

The deal squad working for rival Edgar Bronfman Jr. were expecting to be no less busy. Unlike the folks at GE, though, Bronfman's crew was angry and anxious that the prize was slipping away. His bid valuing VUE at $13 billion may not be enough. Liberty Media formally dropped out the bidding.

Instead of the big cash offer that Vivendi executives initially demanded, GE has outlasted five other players with a non-cash proposal to merge VUE into NBC. After weeks of conversations, NBC finally put it in writing: Vivendi could own 20%-25% of a unit combining VUE's TV and movie studio and its USA Network and Sci Fi Channel with NBC.

The venture would assume VUE's $2.2 billion in debt. A sale could create tax problems tied to Vivendi's 2002 takeover of USA Networks, which had been deemed tax-free to the seller, Barry Diller's InterActive Corp. Vivendi had agreed to indemnify Diller for any tax penalites, so GE may put enough cash into the deal to cover the roughly $2 billion problem.

There would also be a complicated way for the French company to extract some cash. Vivendi's stock in "NBC Universal" wouldn't be liquid, but, as in most similar ventures, Vivendi would get opportunities to cash in all or part of its stake every few years. That arrangement would be structured almost like a GE note that Vivendi could use as the basis of a derivative security resold to institutional investors.

Bronfman's bid would give Vivendi a carried interest in any upside of VUE. But Vivendi Universal CEO Jean-René Fourtou is more interested in the idea of owning 20% of a media conglomerate with the GE name on it than in immediate cash and stake in assets that Vivendi already owns (and it acknowledges it cannot manage well).

Bronfman was blunt during a new meeting with Fourtou in New York last Wednesday. He reportedly argued that a GE deal would hurt Vivendi's remaining shareholders. Instead of raising cash and paying off debt, as Fourtou promised, Vivendi shareholders would be increasing their entanglement in media.

"They had a direct and frank exchange," said one Bronfman adviser. "We remain frustrated. There's a short fuse." The adviser would not say whether that fuse would set off any explosions this week.