Vivendi Rejects Marvin Davis’ Bid, Sources Say

The scramble to snatch up Vivendi Universal’s Hollywood empire began in earnest Tuesday as the French media giant dismissed its first suitor, Los Angeles billionaire Marvin Davis, telling his investment group to pony up more cash if it expects to stay in the hunt, sources said.

At the same time, Vivendi’s board of directors decided to hold on to the world’s largest music company, Universal Music Group, at least for now, because it believes the beleaguered music industry is ripe for a turnaround.

Although the door remains open to Davis, Vivendi moved forward with auction plans by narrowing down the field of competitors to five media industry heavyweights: Liberty Media Corp., General Electric Co.’s NBC, Metro-Goldwyn-Mayer Inc., Viacom Inc. and an investor group led by Vivendi Vice Chairman Edgar Bronfman Jr.

“After two months of work, the process is moving at a sustained pace, and a very significant competition has arisen,” the company said in a statement released after the pivotal meeting in Paris. “In-depth negotiations will now be pursued with selected bidders.”

Competitors were asked to restructure their offers by mid-July to bid only for Vivendi Universal Entertainment -- which includes Universal’s movie studio, theme parks and television businesses -- and not the music division. Vivendi hopes to have the bidding process completed in the next several weeks, by September at the latest, sources said.

The board also set a minimum threshold bid of $11.5 billion for the assets, excluding music, sources said. Analysts estimate that the entertainment unit is worth $10 billion to $14 billion. The music group on its own is estimated to be worth about $5 billion, analysts say.

Selling all the entertainment assets with the exception of music simplifies the process for Vivendi. But the decision to take music off the table is likely to change the dynamics of the bidding contest.

In addition to Davis, Bronfman’s investment group and Liberty Media included music in their bids. The division has been looked upon favorably by some because it is a cash cow for Vivendi, even as it struggles to overcome piracy and sagging sales that have plagued the industry.

Analysts and company insiders said taking music out of the mix could help bolster the bids by MGM and NBC, neither of which were keen on the business. NBC didn’t make a cash bid but instead proposed merging its assets with Universal’s movie studio and cable channels, including Sci Fi and USA Networks. NBC and Vivendi executives are set to meet in the next week for further negotiations, a source close to NBC said.

For its part, MGM, which wants to create an entertainment powerhouse by combining its vaunted movie studio with Universal film and television assets, submitted an $11.2-billion bid.

MGM surprised many observers by becoming a serious contender, overcoming widespread skepticism by putting together financial backing from Morgan Stanley, Bank of America Corp. and Providence Equity Partners. The bid consists of $9 billion in cash and $2 billion in stock, which Vivendi could convert to cash.

“We think today’s developments are very positive for us,” said one source close to MGM, which has reportedly put more cash on the table than any of the other bidders.

Davis’ group was the first to make a bid, offering $13 billion in November for a controlling interest in all the entertainment assets. The former owner of 20th Century Fox submitted a second bid last month that was about $2 billion higher than its original.

Both were deemed too low by top Vivendi executives, who this week began taking their first strategic steps toward dismantling the entertainment assets in the wake of a financially disastrous foray into Hollywood.

Cash-tight Vivendi is shedding the entertainment assets to reduce debt and reposition itself as a French-based telecom company.

A source close to the Davis group said the group was not yet out of the contest.

The source said Vivendi’s top executives had contacted representatives of the Davis team Tuesday, saying that if they wanted to participate in the second round of negotiations, they had to increase their offer.

“We’re evaluating the situation,” said one source close to Davis. “We’re not out of the equation yet.”

The response to Davis wasn’t a surprise to Vivendi watchers, who noted that the company had grown increasingly cool toward the Davis camp, even as his team lined up strong financial backing from respected private equity firms, including Carlyle Group and Texas Pacific.

Earlier this year, Vivendi Chief Executive Jean-Rene Fourtou refused to cede to a demand by Davis to negotiate exclusively with him and even cracked a joke about the oil magnate’s persistence during a meeting with Universal employees.

Some on Wall Street believed Vivendi was merely using Davis to prod other buyers into making higher offers.

“We’re not surprised,” said Michael Nathanson, an analyst with Sanford C. Bernstein. “They didn’t jump at his offer six months ago. They were totally using him as a stalking horse.”

If the Davis group chooses to stay in the contest, it faces a tough decision. Early in the race, one of its key advantages was that it was offering to buy all of Universal, including music. And Davis had made it clear that his offer was an all-or-nothing deal.

Vivendi’s board, however, has decided to retain music for the immediate future, sources close to the board say.

The thinking is that the downturn in the music business has almost bottomed out and Vivendi would fetch a far better price for the unit when the economy improves and the industry takes steps to combat piracy.

Until now, Vivendi had been equivocal on the fate of the world’s largest music company, suggesting to many that it wanted to unload the group even though it was never officially for sale. In fact, earlier this year, Vivendi executives were exploring a possible sale to Apple Computer Inc. That prospect quickly faded after Apple shareholders reacted negatively to the idea.

“Universal has a phenomenal management team, catalog and great labels,” said media analyst Jessica Reif Cohen of Merrill Lynch. “It’s an awful time to sell music.”

Andrew Wallach, a New York money manager said Vivendi has “done a very good job cleaning up their balance sheet, so they don’t have to take a bad offer for anything.”

Malone decided to include music at the last minute but was not especially enthusiastic about the business, sources said. A Liberty Media spokesman could not be reached for comment Tuesday.

By contrast, Bronfman had made music key to his bid. When Bronfman headed Seagram Co., the former owner of the Universal operation, he helped transform the music group into an industry powerhouse.

Bronfman was unavailable for comment Tuesday. But a spokesman for Bronfman said he would go forward with his bid, minus music. Vivendi sources said Bronfman, who has proposed combining Cablevision Systems Corp. channels with Universal TV properties, could ultimately end up buying the music group, but at a later date when the market improves.

“It’s our view that these assets belong together, however, we will proceed as Vivendi has proposed and requested,” said Bronfman’s spokesman, Tod Hullin.

In other developments Tuesday, Vivendi’s board vowed to challenge an arbitration panel ruling that ordered Vivendi to pay former CEO Jean-Marie Messier a $23.5-million severance and bonus package. Messier was ousted last summer after leading a three-year buying spree that left the company on the brink of bankruptcy.