Universal Music on Auction Block?

Universal Music Group (UMG) may go on the auction block to help bail out debt-ridden Vivendi Universal. On March 6, Vivendi announced a record loss of $25.4 billion (€23.3 billion) for the 2002 fiscal year. The biggest loss in French corporate history followed a staggering $14.9 billion (€13.6 billion) loss for 2001.

The major part—$20.2 billion (€18.4 billion)—of the loss was in write-downs of acquired businesses, including $7.1 billion (€6.5 billion) for Vivendi Universal Entertainment, $5.8 billion (€5.3 billion) for Universal Music Group (UMG), and $5.9 billion (€5.4 billion) for television and film unit Canal Plus.

"It would be an understatement to say that 2002 was a difficult year for us," said CEO Jean-René Fourtou at a Paris conference. Fourtou said his company expects its US entertainment divisions to see "a slight revenue gain and more than 30% cash flow growth" in 2003, with recovery for the conglomerate beginning in 2004. Vivendi has cash assets of $4.36 billion (€4 billion), enough to sustain it for several months. French officials recently seized documents from the Societé Generale bank as part of a probe into possible financial irregularities at Vivendi.

The news has fueled new speculation that the conglomerate would sell off its American entertainment divisions, including Universal theme parks, the USA cable network and SciFi cable channel, Universal Pictures, and UMG, the only one of the music industry's "Big Five" to perform profitably last year. "Our priority is to pursue the program of disposals," Fourtou stated. "What are we going to sell, to whom, at what price? I'm not going to say." As presently constituted, Vivendi is a "basket of companies with little synergy between them. Its value is just the sum of its parts . . . We're looking at everything." On Wednesday, March 5, Vivendi's stock rose 9.5% on the New York exchange in response to the news.

Rumored buyers include Viacom (owner of Paramount Pictures), NBC, Liberty Media, Metro Goldwyn Mayer, and oil baron and Hollywood mogul Marvin Davis. Viacom is said to be especially interested in the cable properties; Davis is said to be interested in a bulk deal for all Vivendi's entertainment divisions. He offered $15 billion for the assets late last year. "Davis and his partners have put an enormous amount of time and effort into pulling this thing together and they are not going to walk away from it lightly," said a source quoted by The Hollywood Reporter. Some analysts said they believed that Vivendi could hang on to UMG for its profitability and sell it later when the music business perks up.

The Vivendi roller-coaster ride has hammered the fortunes of several big players. The March 17 issue of Forbes reports that Seagram principals Charles Bronfman and his nephew Edgar Bronfman, Jr. ultimately lost half the value of their original Seagram shares in the acquisition of Universal and merger with Vivendi.

Although not saddled with Vivendi-size debt, AOL Time Warner Inc. has seen its value decline, and several top executives have left, including AOL founder Steve Case, former Time Warner chairman Gerald Levin, and most recently, AOL TW executive vice president Ted Turner. The conglomerate is reportedly exploring the sale of its Warner Music disc manufacturing operation. In 2002, the unit's earnings before interest, taxes, depreciation, and amortization, were $482 million.

Warner Music manufactures CDs and DVDs; the surge in popularity of video discs has pushed up the division's value. Its sale could raise nearly $1 billion for the parent company, according to reports the first week of March. Potential buyers include Thomson SA, owner of RCA and Technicolor, and Canada's Cinram International, Inc. AOL TW is also again in discussions about selling its music business to UK-based EMI Group PLC. Regulatory approval for such a deal would be difficult, according to analysts. Previous proposed mergers with EMI have been nixed by European Union commissioners.

Finally, former BMG Entertainment CEO Strauss Zelnick believes that this is a great time to invest in the music industry, now in its third year of declining sales. Speaking March 6 at the second annual Billboard Music & Money Symposium, the new CEO of ZelnickMedia said that the industry will overcome its present problems and come back stronger than ever—but only if the music industry delivers "compelling products." Referring to CD piracy and the downloading phenomenon, Zelnick said that "new media always disrupt the business initially but then help it boom." He stated that he believes that physical carriers like CDs will eventually become obsolete and will be replaced by "chip-based" formats. He also said he expects one of the industry's "Big Five" to vanish in the near future, but he wouldn't say which one.

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