The French Rejection

By Daren Fonda

Jean-Marie Messier certainly made a splash when he moved to New York City from Paris last year. He settled into a $17.5 million Park Avenue duplex and started popping up at Metropolitan Opera soirees and in the gossip pages. Perhaps that's fitting, since Messier is a former water-company executive who became a man-about-town and a French business celebrity by turning Compagnie Generale des Eaux into a $51 billion global media giant, Vivendi Universal. Messier did it by orchestrating a series of stock-and-cash deals for American assets such as Universal Studios and USA Networks and merging them with a clutch of European media and telecom holdings.

Now that Vivendi has lost more than half its value, Messier simply looks all wet. And some of his French employees are furious. Last week an internal revolt against Messier spilled into the Paris streets after he fired Pierre Lescure, the popular president of Vivendi's money-losing pay-TV company, Canal Plus. Irate workers--claiming once again that Messier was selling out Gallic culture for profits--commandeered a studio, televised a Messier bash-in and protested near the Champs Elysees. Messier refused to back down, and his board looks certain to stand behind him.

Vivendi is just the latest media giant to suffer synergy shock. Sixteen months ago, when he bought the assets of the Seagram Co.--including Universal's movie studio, theme parks and music group--and merged them with Vivendi's European media and telecom holdings, Messier promised a company that "will be the world's preferred creator and provider of personalized information, entertainment and services to consumers anywhere, at any time and across all distribution platforms and devices."

The idea was that by combining content with distribution and cross-promoting the heck out of every film, TV show, song, book and video game the creatives could muster, Vivendi Universal could deliver high-octane growth. To bolster that vision, Messier spent 2001 bulking up with acquisitions: publisher Houghton Mifflin ($2.2 billion), the music website MP3.com ($372 million), the TV and film assets of Barry Diller's USA Networks ($10.3 billion) and a 10% stake in the EchoStar satellite TV service ($1.5 billion). He created a joint headquarters in New York City and moved there in part to reassure U.S. investors that the company would look and feel like an American media firm.

A few billion dollars got lost in the translation. As Vivendi switched to U.S. accounting rules, its net debt was restated upward from $13.1 billion to $17.1 billion. In January, Vivendi diluted shareholder equity by dumping 55 million shares on the market to help pay for recent acquisitions. Then last month the company announced a $13.7 billion write-down, confirming criticism that Messier had overpaid for his empire. That loss includes Vivendi's share of the $1.34 billion the company and its British partner Vodafone pumped into a snazzy Internet portal, Vizzavi, which Messier claimed would be revolutionary. Vizzavi is now practically worthless. To some, it was evidence that Messier--who started his career as a French government bureaucrat--was in over his head. "The market sees him taking on an operational challenge and isn't convinced he has the background, experience or talent to pull it off," says a source close to Vivendi.

That's why Barry Diller, a bona fide media honcho, was brought to the rescue. When Vivendi took control of the USA Networks' TV and film assets (which previously belonged to Seagram), Diller personally got a 1.5% stake in a new partnership called Vivendi Universal Entertainment, worth a guaranteed $275 million. Diller was placed in charge of the venture, which consolidated Vivendi's film and TV assets and theme parks. Messier figured that if anyone could restore order to his empire it would be Diller. But investors didn't accord Vivendi's stock a Diller premium. Problem is, Diller still runs his own company, USA Interactive, which includes Ticketmaster and the Home Shopping Network, in which he has a multibillion-dollar stake. "Barry is the smartest guy in town, but so far it's my impression he's done very little at Vivendi," says an executive close to Universal. Diller and Messier, through spokespeople, declined to be interviewed.

Too bad Diller can't work his magic in the music business. Universal Music accounted for a third of last year's operating income for Vivendi's media and telecom business, but sales and profits in the industry are sinking. When Messier bought Seagram he inherited such top labels as Interscope and PolyGram--for which Seagram CEO Edgar Bronfman Jr. had spent billions. Global-industry music sales fell, however, from $40 billion in 1996 to $33.6 billion last year, largely because of piracy and the advent of easy CD burning. In hopes of attracting paying customers online, Vivendi and Sony came up with a website and a service called Pressplay. So far sales are said to be immaterial.

Investors also fret that Diller or not, Vivendi's TV-distribution outlets in the U.S. aren't strong enough to compete with larger rivals like Fox, Disney and Viacom. The USA Networks' two cable channels (Sci-Fi is the second) reach a combined 157 million households. But Messier paid lavishly to reach those viewers. At USA, ratings declined 9% after the network lost WWF wrestling to Viacom's TNN and MTV. Vivendi's stake in EchoStar, which is merging with DirecTV, provides for five channels, with as many as 18 million subscribers, assuming the deal goes through. But without a major network to air its shows, Vivendi won't generate the big back-end syndication fees that, say, a Viacom can. "Foreign buyers don't like getting USA Networks shows--they want shows that aired on NBC or CBS," says an industry insider.

Vivendi's CFO, Guillaume Hannezo, says the company's top priorities are to lower the debt ratio and restore investor confidence. Last week Vivendi made some progress, striking a deal to sell a business- and-health publishing unit for $1.07 billion. Hannezo says the company beat its targets for cost reductions in 2001, saving more than $250 million. "The cost synergies are obvious," he says. "And the revenue synergies are beginning to happen."

Messier, for his part, has repeatedly stressed that he will focus on operations this year. That will entail restoring morale and profitability at Canal Plus. It's a beloved French asset but a dog, losing $440 million last year. With Lescure's ouster, Messier got a bit of what he wanted: Vivendi's stock rallied. The incoming chief--Xavier Couture--is known as a proponent of trash TV, which reaped big profits for his former TV station, TF1.

Messier often points out that Vivendi made its revenue targets last year, and hit its earnings predictions--before those big charges. But this is the Enron Era. Big companies with complex finances and fuzzy growth prospects won't be getting a warm welcome from shareholders, no matter how big a splash the CEO can make. --With reporting by Bruce Crumley/ Paris and Jeffrey Ressner/Los Angeles

With reporting by Bruce Crumley/Paris and Jeffrey Ressner/Los Angeles