Seagram to Buy USA Networks for $1.7 Billion

Ending a bitter dispute between two of the entertainment industry’s most powerful moguls, the Seagram Co. agreed Monday to pay $1.7 billion to Viacom Inc. for its half share of the popular USA Networks.

By taking control of one of the top-rated and most widely distributed cable channels, Seagram’s Universal Studios division consolidates its position among the handful of conglomerates that can both produce and distribute entertainment through such avenues as cable and broadcast television, retail stores and theme parks.

Under the agreement announced Monday, Universal will own the New York-based USA Network, which reaches 70 million homes, as well as its smaller but fast-growing sister cable service, the Sci-Fi Channel.

Perhaps more important for Universal, the deal frees the company to use its vast library of films and television programs--from the “Jurassic Park” movies to such TV shows as “Coach” and “Hercules: The Legendary Journeys”--to launch new cable channels, perhaps based on its adventure and mystery programming. Cable is the fastest-growing and most profitable segment of the media business.

In the short term, the company said, it intended to offer more original programming on USA Network.

Both Seagram and Viacom have been under pressure from shareholders to settle the disagreement over ownership of the cable partnership, which has been fought in a federal courtroom in Delaware.

Sumner Redstone, Viacom chairman and controlling shareholder, can use the capital from the sale to pay down the company’s heavy debt to boost its sagging stock price.

For Seagram, the acquisition reinforces the beverage and spirits company’s commitment to Hollywood as the first major expansion in entertainment since its 1995 purchase of Universal.

Some shareholders are still miffed that Seagram liquidated its $8.7-billion investment in the conservative DuPont chemical concern to enter the riskier entertainment business. Seagram Chairman Edgar Bronfman Jr. remains under pressure to demonstrate that he made the right strategic decision, particularly since the DuPont shares have more than doubled in value.

While other entertainment powerhouses like News Corp., the Walt Disney Co., Time Warner and Viacom have aggressively expanded their distribution capabilities over the last five years, Universal has made only modest moves, making it more and more difficult to assure an audience for its television programming and films.

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Only Sony among the major studios now lacks a major cable or broadcast distribution outlet.

The agreement that initially set up the cable partnership prohibited Seagram and Viacom from starting or buying cable networks that would compete against USA Networks.

Seagram sued Viacom in April 1996 for breaching the contract by launching the TV Land nostalgia television channel. In the lawsuit, Seagram also claimed its partner’s ownership of MTV, Nickelodeon and VH-1 violated the contract, even though those cable channels were started by Viacom before it acquired the stake in USA Networks through the 1994 purchase of Paramount Pictures.

In a colorful and bitter courtroom fight, the tycoon heads of both companies exchanged embarrassing insults that made for icy relations between the two entities and tough settlement talks. On the stand, Bronfman called Redstone a liar, while Redstone suggested that Bronfman was a lightweight, unschooled in the ways of the media business.

“We are pleased that we were able to amicably settle our differences with Seagram and we look forward to resuming a productive relationship,” Redstone said in a statement.

Bronfman’s statement said, “With the lawsuit behind us, Universal and Viacom can now focus on further strengthening the many relationships which exist between us across the entertainment world.”

Universal won a key legal ruling when federal judge Myron Steele decided that Viacom had breached the contract. But rather than assign damages, Steele urged the companies to dissolve the partnership in a negotiated settlement. If they hadn’t agreed, Steele said, he would have imposed a remedy later this month.

Redstone, trained as a corporate litigator, took the adverse ruling as simply another stage in the negotiations and called for an auction of the network to get the highest price.

Frank Biondi, the former chief executive of Viacom who became chairman and chief executive of Universal Studios shortly after Seagram filed the lawsuit, said in an interview: “It was an expensive partnership in holding us back.”

Biondi said that with the purchase, USA Networks would become the largest contributor to Universal’s earnings, surpassing the company’s theme parks, music, feature films and television businesses. “This is the most vibrant area of entertainment, with predictable results,” he said. “We have a better growth story now.”

Universal hopes to use USA Networks to expand its presence in the cable business. But its leverage could be limited. Most cable operators lack room on their systems for new channels. And an acquisition frenzy over the last two years has left few cable channels up for sale.

As part of the settlement with Viacom, Universal agreed to continue buying programming from Paramount.

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In the immediate term, Biondi sees the potential to expand the Sci-Fi channel, which reaches 45 million of the nation’s 70 million cable households. While USA Network already reaches most cable households, Biondi sees potential to increase advertising revenues by airing more original programming.

“Advertising on these networks sell at 40 to 50% of a discount to the major broadcast networks,” he said. While channels like MTV and Nickelodeon, targeting hard-to-reach audiences, have closed the gap, general entertainment networks such as TNT and USA have not.

Time Warner Vice Chairman Ted Turner is trying to change that by channeling Warner Bros. movies directly to his TNT and TBS cable channels, bypassing the broadcast networks. Universal can be expected to do the same.