U TV now a pillar for Diller

NEW YORK — Universal Studios Inc. is turning over the keys to its television division to Barry Diller.

Seagram Co. Ltd. stunned Hollywood and Wall Street Monday by revealing its plan to sell the USA Network and Universal's television production and distribution businesses to Diller's HSN Inc. for $4.075 billion, made up of a 45% stake in HSN and $1.2 billion in cash.

Many senior Universal TV execs were caught by surprise by the news Monday, since negotiations on basic elements of the sale were primarily held in secret between Diller and Seagram CEO Edgar Bronfman Jr. Execs at both companies had more questions than answers Monday. Most details of the complex deal still need to be hammered out.

Universal is selling USA, with its sibling network Sci-Fi, even before it has a chance to test out full ownership. U is due to complete its purchase of Viacom's interest in USA for $1.7 billion today, although Monday's deal has been under discussion for five months, Bronfman said Monday.

Universal retains its TV comedy production unit, which is handled through a joint venture with Brillstein-Grey; its international production and distribution operations; and its TV library, which Bronfman said was too valuable to sell.

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The deal gives Diller's company, which owns the Home Shopping Network and the Silver King group of TV stations, the critical mass he has long sought to become a major force in television. HSN will get both USA and Sci-Fi, 50% of USA's international operations, along with the production businesses that produce shows such as "Law and Order," "Hercules: The Legendary Journeys" and "Xena: Warrior Princess."

For its part, Universal gets a big stake in a TV broadcast and production company which it could ultimately control, although regulatory restrictions and Diller's desire to retain control ensure that day will be a long way off. But by merging its TV production business with HSN, Universal has ensured the division is now on an equal competitive footing with other studios that own TV station groups.

Adding eyes

At the same time, Bronfman and Diller said the combination could increase USA Network's audience reach from 65% to 90% by broadcasting some USA Network programming on Silver King stations. In combining the marketing and distribution operations of USA, Sci-Fi and HSN, Diller will be able to streamline those operations and gain new clout in selling HSN to cable operators.

The deal "meets the needs of both partners in a really unique way," said Bronfman.

Wall Street applauded the transaction, pushing Seagram stock up $2.81 to $35.25 while HSN stock rose $3.25 to $41.87.

Most analysts said the deal clearly benefited Diller but the implications for Universal are not as clear. "You have a whole new company emerging in HSN," said Montgomery Securities analyst John Tinker.

HSN transformation

In the past two years, Diller has transformed HSN — overseeing a turnaround at the Home Shopping cable channel and developing plans for a new programming service to run on the company's 12 full-powered TV stations. The first station to carry the new service, in Miami, launches it in April, and Diller said Monday it may now be named Miami, USA.

The deal highlights once again the close personal relationship between Bronfman and Diller, and raises questions about the role Universal CEO Frank Biondi will play in the future. Bronfman revealed publicly his reliance on Diller last year when he testified at a Delaware court hearing that he began work on a possible bid for CBS simply because Diller suggested it to him.

Now Bronfman has essentially given Diller the keys to U's TV engine. Diller will exercise Universal's voting rights on its stock as long as Diller stays as CEO of HSN. "Barry wants to be in control of the company, and because he and I have been friends for more than 20 years, I am entirely confident with him voting our shares," Bronfman said in an interview.

Some on Wall Street were puzzled by Seagram's actions. "Its a very expensive way to hire Barry Diller," said one investment banker.

Eye toward distribution

Bronfman insisted, however, that the deal was essentially Seagram's way of buying a TV station group. "I think about this company in generational terms, and I am concerned about what we are building not over the next five to 10 years, but over the next 20 to 30 years."

U has options to increase its stake in HSN up to 57% over several years. Bronfman added, "We are going to own (HSN) at some point in time, and the person to build it in the meantime is Barry Diller."

Whether Universal can ever exercise control will be partly up to the Federal Communications Commission, however, because Seagram is a Canadian company and therefore unable to buy TV stations. For that reason, Universal's stake in HSN won't be held at the parent level, and the deal will undergo review by the FCC.

Edgy execs?

"If you were (CEO) Frank Biondi or (Universal TV chief) Greg Meidel, what would you be thinking this morning?" said one industry exec.

Biondi and Meidel dismissed these suggestions (see separate story). "I'm happy with the outcome," said Biondi, although he admitted to some disappointment at not getting the chance to directly oversee USA.

"Edgar will tell you that he wanted to be in business with Barry, and there are very few ways to do that, because Barry won't work for anybody," Biondi added.

Wall Street sources said Bronfman has grown increasingly impatient with the slow pace of Universal's turnaround since Seagram acquired the entertainment conglomerate in mid-1995 — particularly as many observers have compared how much Seagram could have made in the meantime if it retained its stake in Du Pont, which was sold to finance the Universal purchase.

Spinning prices

Bronfman was at pains to point out in an interview, and on a call with Wall Street analysts, that the price of Monday's deal vindicated Seagram's original purchase. He claimed that it meant Seagram had paid just $4 billion for the rest of Universal.

He and Diller praised Universal's existing team. "Frank has done an outstanding job in creating value in this business. He remains chairman and CEO of Universal, where he is going to be building value in all of the other businesses," Bronfman said.

"Greg Meidel has done a first-rate job in organizing and breathing life into this Universal asset," Diller said.

In an era when broadcasters and program producers are increasingly aligning, however, Universal's TV division has been held back by its lack of distribution.

"The future of the independent TV production business domestically, no matter how good your management team, is limited in its ability to grow given its lack of distribution. That is why it was necessary to do this transaction," Bronfman said.

Cable jewel

He added, however, that the "biggest piece of this" is the sale of USA Networks to HSN. Because Diller's company is 30% owned by Tele-Communications Inc.'s programming affiliate Liberty Media, the deal gives TCI an indirect interest in USA, which "further increases the strength of the cable networks," Bronfman said. (TCI's interest will be diluted to 15% by the deal.)

At the same time, the combination of USA and HSN's Silver King stations "allows us to create a hybrid" which can extend the audience reach of USA. The cable network now reaches 65% of U.S. homes, and Silver King's 25 stations can take that to 90%, even allowing for overlapping markets, Bronfman said.

The aim is to "narrow the gap between cable and broadcast cost per thousands" advertising rates, he added.