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Romancing Vivendi

Vivendi Universal is continuing the slow, summer pace of the auction of its U.S. entertainment assets, planning to spend the next couple of weeks in negotiations with pretty much all six suitors that have been courting the company.

Indeed, the biggest move last week wasn't by a bidder but by Vivendi itself, which decided to pull Universal Music off the auction block.

Initially, Vivendi was so eager to unload its U.S. assets that it requested bids not just for cable networks USA Network and Sci Fi Channel (which every player covets mightily) but also for Universal Studios (which some bidders wouldn't mind owning) and Universal Music (which no one wants).

A few myths emerged in the frenzy following last Tuesday's meeting of Vivendi Universal's board of directors to review bids that had been submitted eight days earlier. One is that a second round of bids is due in two weeks. (In fact, no deadline has been set; the company is scheduling talks with the players.) A second myth is that the board has established an $11.5 billion floor for the next round. (Not true, said one Vivendi adviser involved in the auction.)

A third is that oilman Marvin Davis has been shut out of the next round of bidding. That's not quite true, but his investor group was firmly told that he must substantially raise his bid.

That's in large part because Davis has nothing else to bring to the table. Whereas Vivendi once was focused on getting as much cash for Vivendi Universal Entertainment as it could, the company is signaling an increased willingness to continue to stay in for a piece, either by keeping shares in the buyer or by carrying interest in an entertainment subsidiary of the company that eventually gets the prize. Vivendi, said one executive involved in the auction, "is looking not at price but at value."

Only four companies actually submitted bids: John Malone's Liberty Media (the strongest bidder), MGM (which moved to sell $500 million in assets last week), an investor group led by Edgar Bronfman Jr. (backed by Cablevision Systems, which agreed to buy MGM's $500 million in assets), and Davis.

General Electric didn't actually bid but only proposed a merger of VUE and its NBC subsidiary. Viacom didn't even go that far, telling Vivendi orally that it's interested in VUE's cable networks.

Vivendi wanted offers for Universal Music as well, a troubled company in a troubled sector that none of the suitors is eager to buy. That lack of enthusiasm was depressing the price put on the other assets, so Vivendi decided to keep it, attempt to turn it around itself and then probably sell it later.

Liberty CEO Malone has been seen as the leading bidder because he has substantial financial capacity and a public stock to use as a currency and—unlike Viacom or GE—is actually willing to buy what Vivendi says it wants to sell.

But Malone surprised everyone last Thursday by agreeing to pay $7.9 billion to acquire Comcast's end of their partnership in QVC. That plus VUE would commit Liberty to $19 billion-$20 billion, a huge stretch even for Malone, whose financial engineering over the past several years leaves him with lots of stray assets to borrow against. Morgan Stanley media analyst Richard Bilotti estimated Thursday that, even if Malone snags both deals, he'll have $2.5 billion in borrowing capacity left over.

Vivendi is only loosely following the auction process it has laid out, and following this slowly bouncing ball is a little tricky. "Viacom didn't bid at all and is still in the game," said an executive with one of the bidders. "Davis bid for it all, as they asked, and is pretty much out of it. Go figure."