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Diller doing a deal for film companies

After saying last week that he had no plans to become a "studio guy," the USA Network chairman indicates strong interest in buying Gramercy Pictures and October Films.

NEW YORK--USA Network chairman Barry Diller promised Wall Streeters late last week that he had no plans to become a "big studio guy," but the one-time president of Paramount Pictures has indicated strong interest in buying October Films and Gramercy Pictures, sources said Friday.

Diller told a meeting of analysts and investors Thursday afternoon that his interest in October and Gramercy was driven by the trend toward vertical integration of the industry, noting that Warner Bros. now sells its pictures to the TNT cable network. Both Warner and TNT are owned by Time Warner.

Seagram and Diller's USA Network are believed to be close to an in-principle agreement on the $200 million acquisition of October Films and Gramercy Pictures. Differences remain but will likely get bridged eventually, sources close to the situation believe. Neither Seagram nor USA would comment Friday.

USA is expected to pay about $95 million for October, of which $70 million will be assumption of the indie's debt, while spending about $100 million more for Gramercy Pictures and 42 pictures made by Gramercy's former parent, Polygram Filmed Entertainment. Seagram acquired Polygram last year and has gradually been selling pieces of the company.

In his first semipublic comments on the October/Gramercy deal, Diller told Wall Streeters during a four-hour meeting that he liked the idea of competing with Miramax in the specialized film arena, according to those who were present.

"He was absolutely categorical about precisely how he wants to get into the movie business," said one analyst.

Investors are generally wary of the film industry, because its profit returns are extremely low compared with those in other showbiz sectors.

The analyst noted that the film deal, which is at least a week from completion, is a low priority for Diller. In contrast to the $200 million acquisition, USA is proposing a $22 billion merger with Internet portal Lycos, in which USA's Home Shopping Network and controlling stake in Ticketmaster Online-Citysearch would be merged into Lycos. USA would keep control of the new Lycos/USA Interactive Networks.

But the deal has become controversial among Lycos shareholders, who believe it undervalues the Internet company, which had revenues of $90 million last fiscal year and lost about $9 million. The USA assets being contributed generated revenues of $1.45 billion and cash flow of $195 million (cash flow being earnings before interest, taxes, depreciation, and amortization).

Diller left analysts with the impression that he had little intention of raising the price for Lycos.

If the Lycos deal goes through, USA would be left as a traditional entertainment company with the USA and Sci Fi cable channels and its broadcast stations, which are the core of its embryonic new network.

Diller is thought to be pursuing acquisitions to beef up USA aside from October/Gramercy. He refused to comment when analysts asked about reports that he is negotiating to acquire Rainbow from Cablevision Systems but left the impression that a deal was on the table.

Diller told the group he wanted to buy cable programming assets that had a potential for growth but noted that Cablevision chairman Chuck Dolan was not known for selling anything at a good price. Rainbow's Bravo network would make a good fit with October and Gramercy, however.

USA's chief financial officer, Victor Kaufman, gave monetary projections for the company into fiscal 2000, revealing that the broadcasting side would lose $90 million this year and $95 million next year. Diller is launching a new broadcasting format, beginning with the WAMI TV station in Miami.

Overall reaction from analysts was positive, although they noted there was little news to come out of the meeting. USA stock was down .44 to 39.06 this morning.

Story Copyright © 1999 Reuters Limited. All rights reserved.