Liberty’s Interest in Vivendi Assets Fading

Another suitor for Vivendi Universal’s U.S. entertainment empire -- Liberty Media Corp. -- has contracted a case of sticker shock and won’t offer the minimum $14 billion the French conglomerate wants, sources familiar with the auction said Wednesday.

The decision by Liberty Media Chairman John C. Malone came less than two weeks after Metro-Goldwyn-Mayer Inc. withdrew from the contest, leaving Vivendi with an even weaker hand in trying to stir up a bidding war.

The refusal of both Liberty and MGM to pay what they consider to be an inflated price reflects growing frustration among bidders and bankers who complain that Vivendi is overplaying its hand, giving parties mixed signals and laying down shifting requirements.

Despite his fading interest in Universal, Malone isn’t expected to officially back out of the race. Although Liberty and Vivendi executives declined to comment, both sides are said to be still negotiating.

Only a month ago, Englewood, Colo.-based Liberty was viewed as a front-runner in the hunt for Universal’s movie studio, theme parks and television assets, mostly because of its huge cash pile and the ambitions of its chairman.

Now, with the number of suitors dwindling, NBC is considered to have the best shot at Vivendi Universal Entertainment through an acquisition that would create an entertainment giant.

The General Electric Co. unit would merge Universal’s film and TV studios with NBC’s broadcast network and cable channels -- MSNBC, CNBC and Bravo -- and with its newly acquired Spanish network, Telemundo.

In that scenario, Vivendi would receive a minority stake in the resulting company and possibly a valuable chunk of stock from GE, a corporation that the French admire for its conservative and disciplined approach to business. That arrangement, in the long term, could well bring Vivendi its target price, if the stock price of the new entertainment company went high enough.

Other bidders remaining include a consortium headed by Vivendi Vice Chairman Edgar Bronfman Jr., who is said to be preparing a second offer.

Price issues aside, there are several other reasons behind Malone’s waning interest in Universal.

Chief among them was Liberty’s recent decision to pay $7.9 billion for Comcast Corp.’s 57% stake in home shopping channel QVC.

The deal accomplished one of Liberty’s most important objectives: to take a controlling interest in an operation to avoid being taxed as a mutual fund because of its many minority positions in media companies.

What’s more, after the announcement of the QVC deal, the ratings agency Moody’s Investors Service warned that it might lower Liberty’s credit rating to below investment grade, or junk status, if it also attempted to buy Universal’s assets. Malone is known to be especially sensitive to the company’s standing with credit firms.

Relations also have been strained between Liberty Media and Vivendi.

Liberty this year accused Vivendi in a lawsuit of hiding its financial problems to entice the company into a stock swap last year that helped create Vivendi Universal Entertainment. That arrangement made Liberty a large shareholder in Vivendi with 3.6% of the shares.

Liberty was among four groups that submitted a first round of bids for the entertainment assets in late June, offering more than $14 billion for all of Universal, including the mammoth music group, which Vivendi has since pulled off the table.

Liberty and other bidders have been asked to submit a new, higher round of bids by Aug. 18.

Malone, along with the other contestants, was said to be increasingly frustrated with the auction process, which has been roundly criticized as chaotic. “He’s fed up with the process,” said one source close to Liberty.

Many were puzzled, for example, when the company recently invited Comcast to join the bidding fray even after the cable giant had missed the first round of bids due in June.

During the first stage, Vivendi rebuffed a cash offer from a consortium fronted by oil magnate Marvin Davis, which is not expected to submit another bid by the new deadline.

Meanwhile, Viacom Inc. has downplayed its interest in the Vivendi properties, saying it would not like to acquire anything outside the cable channels.