Diller Poised for Return to Movie Business

Barry Diller has plans to reenter the movie business.

The chief of USA Networks, who early in his career achieved fame as the young head of Paramount Pictures, is negotiating with Universal Studios to take control of the specialty film distributor October Films, as well as some assets of PolyGram Filmed Entertainment, according to sources close to the transactions.

The addition of filmmaking would add one more dimension to Diller’s increasingly formidable media empire. While many in Hollywood have focused on DreamWorks SKG’s struggle to build a new studio from scratch, Diller, on a foundation of castoffs from other media moguls, has assembled assets over the last three years that today are valued at more than $15 billion.

While Diller has repeatedly criticized the movie business in recent years for its difficult economics, sources say he is comfortable with the risk of lower-budget movies that cost less than $10 million to make. He also sees potential for a cable channel focused on the arts that would televise highbrow films like the ones released by October, whose titles include “The Apostle,” “Breaking the Waves” and “Secrets and Lies.” It is unclear whether PolyGram’s 30% stake in the Sundance Channel, which specializes in independent films, is part of the negotiations.

In addition to his long interest in art-house films, sources said, Diller is eager for the touch of class and top-drawer talent these associations could bring to his operation, whose flagship assets, the USA Network and the Home Shopping Network, are based on mass appeal.

Sources emphasized Monday that Diller’s negotiations could still unravel. For Universal, which owns 45% of USA Networks, selling duplicative assets has been part of a plan to offset the cost of the recent $10.4-billion purchase of PolyGram, which Universal’s parent, Seagram, bought primarily for its music business.

Yet some Hollywood executives wonder whether the sale of October signals a waning commitment by Universal to movies. The studio has suffered from a dry spell at the box office, and Seagram is under severe pressure to prove that its redirection of the Canadian spirits and beverage giant into entertainment will pay off.

Universal bought its 51% stake in October less than two years ago in the hope of creating a high-quality, low-budget specialty label comparable to Walt Disney’s successful Miramax Films, the source of “Pulp Fiction,” and 20th Century Fox’s Fox Searchlight unit, which won praise for “The Full Monty.”

Though Diller has not been involved in the movie business since 1992, when he left as chairman of 20th Century Fox, many analysts believe he is likely to have greater success with October than Universal has, which is preoccupied with digesting PolyGram and cutting its work force.

Some sources close to the deal suggested a sale by Universal would be primarily a financial maneuver to buff up the balance sheet and move assets onto the books of USA, which has more capacity to accommodate debt. The two companies have been intertwined since last year when Diller bought control of most of Universal’s television assets, including USA Networks, in exchange for giving Universal 45% equity.

Though the biggest moneymakers in Diller’s portfolio are USA, Home Shopping and Ticketmaster, the fastest-growing segment are the Internet interests he took public last month to tap into the market’s frothy valuations.

Ticketmaster Online-CitySearch, which provides online ticketing services and local entertainment and shopping listings, already is worth half the parent company, and analysts expect Diller to use his highflying currency to acquire additional Internet sites. In its first purchase, the company said Monday that it will buy an online auction service called CityAuction, which specializes in selling collectibles, antiques and computers.

Through Ticketmaster and Home Shopping Network, Diller has a large back-office fulfillment operation that could support his forays into electronic commerce.

“We are organizing ourselves to be in a position to benefit from the growth in electronic commerce,” said Diller, 56. “We are laying down as many concepts in retailing and auctioning in anticipation that all of this will be sorted out in the next several years.”

Diller would not comment on negotiations with Universal.

The terms of the October deal, first reported last week in trade paper Variety, could not be determined. But Universal bought its controlling stake for an initial $10 million, with an additional compensation worth up to $50 million based on the performance of October.

Sources close to Diller say USA Networks has no plan to buy the remaining 49% of October, which is owned by an investor group led by his close friend Herbert Allen, whose investment bank, Allen & Co., capitalized the formation of the distributor in 1992. Sources say Diller plans to keep October’s current management team.

PolyGram Filmed Entertainment could be a bigger transaction--perhaps as much as $400 million, depending on the assets included in the deal. Sources say Universal executives would like to keep PolyGram’s international assets, including 14 satellite distribution offices and the vaunted Working Title label.

That would leave Diller a small television production operation.

Times staff writer Claudia Eller contributed to this report.