Damage Control:
How Messier Kept Cash Crisis
At Vivendi Hidden for Months
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Media Giant Was at Risk
Well Before Investors Knew;
Now, Criminal, Civil Probes
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Aide's Vision of 'Death Seat'

On Dec. 13 last year, Guillaume Hannezo sent Jean-Marie Messier, chairman of Vivendi Universal SA, a desperate handwritten plea.

"I've got the unpleasant feeling of being in a car whose driver is accelerating in the turns and that I'm in the death seat," wrote Mr. Hannezo, the company's chief financial officer. "All I ask is that all of this not end in shame."

That very day, unknown to investors and the Vivendi board, the company had narrowly averted a downgrade by credit-rating agencies, which would have made it difficult to borrow money and plunged the company into a cash crisis. Mr. Hannezo (pronounced AN-ZO) implored his boss and longtime friend to take serious steps to reduce Vivendi's ballooning debt.

When the company's board met the next day to consider whether to approve a roughly $10 billion acquisition of USA Networks Inc.'s TV and film businesses, Mr. Messier made no mention of the close call with the rating agencies. Instead, when a director asked about Vivendi's financial profile, Mr. Messier said the company had no problem, according to two directors who were there.

The board endorsed the USA Networks deal, buying Mr. Messier's pitch that it would help complete Vivendi's transformation from a onetime water utility into an entertainment giant. He boasted that the company would be able to distribute the movies and music made by its Universal Studios and Universal Music units by means of cellular devices, as well as by satellite, cable and pay television.

But Vivendi was already in dire financial straits. The USA Networks deal, along with a $1.5 billion investment in satellite-TV operator EchoStar Communications Corp., in fact signaled the beginning of the end for Mr. Messier. The boy wonder of the French business establishment was ousted seven months later, in July, after directors discovered the company was skirting close to a bankruptcy filing.

As new management struggles to salvage the French conglomerate, it has become clear that Vivendi came close to financial disaster far earlier than previously thought. That picture is starkly at odds with the one repeatedly presented by Mr. Messier to investors and his board.

Mr. Messier, a former top investment banker with Lazard LLC, was famously fond of deal making. But now it turns out he pursued many more deals than has been publicly known. More important, he spent billions of dollars buying back Vivendi stock on the market last year without consulting his CFO or the board, according to people familiar with the situation. Trying to prop up the stock price, he instead only sent Vivendi's debt soaring.

The company itself barely kept up with its chairman's aggressive spending. Disorganization and inadequate staffing in Mr. Hannezo's finance department routinely resulted in its being three months behind in assessing cash and debt levels, according to people familiar with the situation. Mr. Messier, meanwhile, led investors and board members to believe Vivendi's cash situation was better than it really was by systematically including earnings from partly owned subsidiaries in his financial presentations, even though Vivendi didn't have access to their cash flow. The board, to be sure, could have been more aggressive in overseeing Mr. Messier. It allowed him to operate largely unchecked.

Still, Edgar Bronfman Jr., the Seagram Co. scion who sold the Canadian company to Vivendi two years ago and now is vice chairman of Vivendi's board, said in a recent CNBC interview, "Anybody who either worked for the company [or] invested in the company should feel betrayed."

The accuracy of Mr. Messier's financial communications are now under criminal investigation by the Paris public prosecutor's office. France's stock-market watchdog, la Commission des Operations de Bourse, is separately investigating whether he misled his board and investors. Olivier Metzner, Mr. Messier's lawyer, declines to comment.

The COB questioned Mr. Messier for most of two days earlier this month. The regulator has also interviewed a wide range of other company executives, including Mr. Hannezo. The CFO has given the COB a large binder of documents meant to show that he tried to rein in Mr. Messier. The Wall Street Journal has reviewed copies of some of the documents, including e-mails and handwritten notes Mr. Hannezo sent to his boss between late 2000 and June 2002.

Now living on New York's Park Avenue with his family and planning to start his own private-equity firm, Mr. Messier is a defendant in at least 16 shareholder lawsuits in the U.S. and one in France. The suits allege, among other things, that the 45-year-old businessman concealed the company's cash problems while talking up its prospects. Last month, Vivendi's board denied him a severance package he was seeking of more than $18 million.

A former top Vivendi executive denies that Mr. Messier gave a misleading impression of the company's financial state. This person says that Mr. Messier made some mistakes but maintains the real cause of Vivendi's troubles is a rumor campaign with the theme, "Vivendi is France's Enron." This campaign has been orchestrated by a small group of people to destabilize the company, the former executive asserts. He declines to identify those purportedly pressing the attack or their motive but says they "are gravely responsible" for Vivendi's woes.

Mr. Messier arrived at the water utility Cie. Generale des Eaux in 1994 and after becoming CEO two years later, changed its name to Vivendi SA. In late 2000, he engineered its merger with Seagram and French pay-TV firm Canal Plus SA. In just 18 months, beginning in December of that year, Mr. Messier took Vivendi Universal from a company that had only $3 billion in debt to one with debt of $21 billion.

After a huge three-way merger, most corporate chairmen would hold off on further deals while making sure the newly attached businesses were working well together. Not Mr. Messier. Within days of the merger's completion, he announced the $2.2 billion purchase of a 35% stake in Morocco's telephone monopoly. The transaction left many Vivendi executives incredulous, according to people familiar with the situation. Mr. Messier decided on the deal after a trip to Morocco, during which he spent time with the country's king, Mohammed VI, according to people familiar with the situation. The investment, Mr. Messier argued internally, was intended to give Vivendi's telecom unit, Cegetel, more heft in separate acquisition negotiations. Those talks ultimately didn't come to fruition.

In 2001, Mr. Messier tried to engineer one deal after another. He held secret but inconclusive talks to make a multibillion-dollar investment in AT&T Corp. or, alternatively, in Comcast Corp., according to a person familiar with the situation. He also considered a possible deal with NBC. He met with Jeffrey Immelt, CEO of NBC parent General Electric Co., at least twice last fall and early winter. One of those meetings included Barry Diller, then chairman of USA Networks, according to people familiar with the gatherings. GE ultimately said no.

In a 23-page memo he submitted to the COB, along with other documents, Mr. Hannezo says he opposed all of Mr. Messier's acquisitions in 2000, 2001 and 2002, except the merger with Seagram and the USA deal. Messrs. Messier and Hannezo had known each other for 20 years. Both had attended L'Ecole Nationale d'Administration, France's elite school for top civil servants. In the mid-1980s, they had worked together as young staff members at the French finance ministry. In 1998, two years after taking Vivendi's helm, Mr. Messier had hired Mr. Hannezo as CFO.

His shirt often untucked and hair unkempt, the absent-minded Mr. Hannezo chain-smokes cigars and sometimes picks his teeth with his pen, according to people who have worked with him. Mr. Messier, by contrast, presents the picture of the debonair CEO. He wears designer suits, has appeared in Vanity Fair and moved in high-powered social and philanthropic circles in Paris and New York.

Although Mr. Messier often ignored his advice, Mr. Hannezo, now 41, did manage to kill a few of his boss's deals, according to his memo for the COB. For instance, he says in the memo he scuttled Mr. Messier's attempt to acquire luxury-goods mogul Bernard Arnault's Internet holding company, Europ@web, for $700 million in March 2001, after the dot-com bubble had popped. Europ@web is now in the process of being dismantled.

At times, at least some members of the Vivendi board seemed unprepared to keep up with the pace and complexity of Mr. Messier's activity. Of Vivendi's 19 directors, 12 were French, yet all board meetings took place in English. When discussions of deals turned to technical issues, the French directors would put on headphones and listen to a piped-in translation. "You'd hear this monotonous, hesitant voice translating extremely complicated financial stuff, with some figures in euros, others in dollars, and a shift back and forth between French and U.S. accounting standards," says one French director. "It put you to sleep, diminished your capacity to analyze critically."

The former top Vivendi executive says Mr. Messier's dealmaking was comparable with that of many large companies, and Mr. Messier would have been remiss not to be "constantly on the lookout for opportunities." This person adds that Mr. Messier devoted a lot more time to operational matters than he did to deals. This person also says Mr. Hannezo's "role as CFO was to be `Mr. No'" -- to limit company spending as much as possible. "That's what he was paid for," the former top executive says. This person denies that the use of English in board meetings made the French directors less vigilant, calling such a notion "beyond ridiculous."

Mr. Hannezo never alerted the board of his concerns about Mr. Messier, nor did he attempt to resign, according to current and former executives and directors. Moreover, the disorganization of Mr. Hannezo's department was one reason Mr. Messier had such wide latitude, according to current and former executives and directors. The department had just 12 employees, compared with about 100 in the group handling public relations and communications.

The board signed off on Mr. Messier's acquisitions. But it did so without knowing the full extent of his spending spree, current and former board members say. That is because Mr. Messier didn't tell the board about his single biggest expenditure: the purchase of 104 million Vivendi shares, or nearly 10% of the company's equity, on the stock market during 2001. His purpose was to prop up the share price. The cost: $6.3 billion.

Shareholders had earlier approved a resolution allowing Vivendi to buy back up to 10% of its shares. But current and former directors say they expected to hear beforehand about such massive purchases. Mr. Messier had a special incentive to boost Vivendi's share price with the buybacks: He had made a massive bet on the company's behalf that Vivendi shares would rise by selling "put options" to banks in late 2000. The options committed Vivendi to buy back tens of millions of its shares at fixed prices in the future. If Vivendi's share price were to fall, the company could lose as much as $1.4 billion on the options. Even with the buybacks, the share price fell in the end. So far, the put options have cost Vivendi $900 million.

Mr. Hannezo opposed the stock purchases as a waste of cash, regardless of the options. This resulted in Mr. Messier trying to circumvent his CFO on the buybacks. The ex-chairman placed his stock orders by phone with two mid-level employees in the finance department, Hubert Dupont Lhotelain and Francois Blondet, according to a person familiar with the matter. Messrs. Dupont Lhotelain and Blondet didn't return phone calls seeking comment.

In early December 2001, the CFO finally intervened by forbidding his subordinates to take Mr. Messier's phone calls, the person familiar with the situation says. Mr. Hannezo set up a formal process to slow Mr. Messier down, requiring that the chairman request buybacks in writing, along with some justification. The former top Vivendi executive says the share buybacks were disclosed to the COB each month, as required. This person also says the board's audit committee was updated on the buybacks at a meeting in June 2001. Even so, this person adds, Mr. Messier wasn't obliged to consult with either the directors or Mr. Hannezo about the buybacks. The shareholders and board had entrusted Mr. Messier with the authority to conduct such transactions, the former executive adds. The put options were disclosed in Vivendi's 2000 and 2001 annual reports.

By December, the buybacks had taken their toll: Vivendi was running out of cash, according to Mr. Hannezo's memo to the COB. An immediate disaster was averted when Vivendi sold a 9% stake in Vivendi Environment, its utility unit. And after months of regulatory delay, Vivendi also received an $8.15 billion payment from Pernod Ricard SA and Diageo PLC for Seagram's liquor business, which had been put up for sale after the Seagram acquisition.

In the meantime, the rating agencies were threatening a downgrade. After Mr. Hannezo's Dec. 13 "death seat" note, Mr. Messier decided to raise even more cash. In early January, the company abruptly sold stock valued at $3.2 billion -- about half of the shares Mr. Messier had bought back earlier. The former top Vivendi executive says the company's situation was comfortable at the end of December. The company still had back-up bank credit lines, under which it could borrow up to $3 billion, the former executive says.

Despite Vivendi's close calls at the end of 2001, Mr. Messier acted on his view that the company was drastically undervalued. Around this time, he invested $20 million of his own, and $5 million more he borrowed from a French bank, in Vivendi shares, according to a person familiar with the situation. In all, he bought more than 500,000 Vivendi shares for his own account. In early March, Mr. Messier gave a rosy spin to Vivendi's awful 2001 results in a presentation he was preparing for the press. Vivendi was on the verge of announcing a $12.7 billion loss, the largest ever in French history.

In an e-mail to Mr. Messier on March 4, Mr. Hannezo wrote, "Our jobs, our reputations are at stake. What investors want to know right now is the following: Is VU a total fraud like Enron? Is VU threatened by its debt? Has J-M-M [Mr. Messier] completely lost it?" The e-mail continued: "The problem isn't our businesses; it's us, or more exactly, it's you. The problem we have to solve is your credibility that you're in the process of losing." Mr. Messier was in New York that day, conferring with actor and director Robert Redford about a film project for the Sundance Film Festival, according to people familiar with the situation.

The next day, March 5, Mr. Messier, sporting a deep tan from a two-week skiing vacation in Colorado, projected his trademark self-assurance at a packed news conference in Paris. "Vivendi is in better-than-good health," he proclaimed.

Wall Street executives weren't so sure. A number of investment banks approached Vivendi in the following weeks and suggested it raise money through a bond sale. A team from Citigroup Inc., at Mr. Hannezo's request, spent three days combing through Vivendi's books and came to a grim conclusion: Vivendi was going to run out of cash within a few months, according to people familiar with the situation. The bank offered to arrange a standby credit line, under which Vivendi could borrow $2 billion to $3 billion, but talks fell apart over the structure of the financing.

On April 24, Vivendi's board gathered under a tent next to the Paris concert hall, le Zenith. At one point, Mr. Messier put up a chart comparing the company's cash flow to its debt. The board spent more than half an hour discussing the chart, and at the end of the discussion, "nobody was any clearer," according to one board member in attendance.

Mr. Messier included the cash flow of units in which Vivendi owned less than a 50% stake, notably Cegetel, of which Vivendi owned only 44%. While not a violation of French or U.S. accounting standards, this approach overstated how much cash Vivendi could tap for such purposes as reducing debt. While it controlled Cegetel, Vivendi didn't have access to the cash generated by the telecom company. Vivendi had in fact borrowed nearly $1 billion from Cegetel during 2001.

The former top Vivendi executive says it was legitimate to consolidate Cegetel's cash flow because Vivendi controlled Cegetel and could force the telecom unit to pay it a dividend. But this person says it was a mistake to try to summarize the complicated financial relationship for the board in a single chart. In May, Fehmi Zeko, head of the media group for Citigroup's Salomon Smith Barney investment bank, met with Mr. Bronfman in New York and told him what the bank had learned during its financial analysis in Paris. By then, news of Vivendi's costly put-option obligations had surfaced in the press, and Moody's Investors Service had downgraded Vivendi's debt to just a notch above "junk" level.

After the meeting, Mr. Bronfman phoned Mr. Hannezo, who denied there was a problem, according to people familiar with the conversation. Mr. Bronfman nevertheless insisted that Vivendi bring in an outside firm to analyze its cash situation. At a meeting in New York on May 29, the board hired Goldman Sachs. On June 24, the eve of Vivendi's next board meeting in Paris, Goldman Sachs bankers gave a detailed rundown of their conclusions to Vivendi's top executives and a handful of directors, including Mr. Bronfman, according to people familiar with the situation. The investment bank outlined four scenarios, one of which showed Vivendi having to file for bankruptcy protection as early as September or October. That day, Vivendi's share price dropped 23%.

After Goldman Sachs's grim presentation, Mr. Messier asked Mr. Bronfman to come to his office. Mr. Bronfman told Mr. Messier he should resign, as it was now clear Vivendi faced a severe cash crisis, according to a person familiar with the conversation.

The next day, Goldman Sachs repeated its findings before the full board. Mr. Messier interjected often, arguing that the investment bank was painting an overly negative picture, according to people who were there. He suggested that Vivendi could do a bond offering if it needed extra cash. But one of the Goldman Sachs bankers said he doubted that would be possible. Mr. Messier rebuked the banker, saying Goldman Sachs wasn't there to give market advice, according to a person who was present. Goldman Sachs declines to comment.

After the session, in one-on-one conversations with other directors, Mr. Bronfman pressed for Mr. Messier's ouster, according to current and former board members. Mr. Bronfman argued that the chairman had concealed from the board the company's financial difficulties.

But Mr. Messier survived a vote of confidence, thanks to the support of the French directors. He had told his countrymen that Mr. Bronfman was after his job, according to people familiar with the situation. At the COB's request, Mr. Messier put out a detailed debt-and-liquidity statement the next morning, June 26. Echoing four upbeat press releases he had issued in previous weeks, Mr. Messier said, "Vivendi Universal is confident of its capacity to meet its anticipated obligations over the next 12 months." That afternoon, he told analysts on a conference call that he planned to remain Vivendi's chairman for 15 more years.

The former top Vivendi executive says several unanticipated events in the days following the June 26 press release worsened Vivendi's situation. These included revelations about WorldCom Inc.'s accounting troubles and a German bank's reneging on a back-up credit line for Vivendi. By then, the French directors had changed their minds, in part because two of Vivendi's three main creditors, BNP Paribas SA and Deutsche Bank, would not lend the company any more money as long as Mr. Messier remained. The directors forced him to resign on July 1.

At a French parliamentary hearing last month, Jean-Rene Fourtou, Vivendi's new chairman, was asked about Vivendi's finances when he took the company's reins July 3. "Well, if Mr. Messier had stayed, the company would have gone bankrupt within 10 days," he said.

Tracing Vivendi's Troubles

-- June 20, 2000: Vivendi announces takeover of Seagram, owner of Universal Studios, and Canal Plus for $46 billion.

-- Dec. 21: Vivendi buys a 35% stake in Morocco Telecom for $2.2 billion.

-- Sept. 17, 2001: Jean-Marie Messier (left), Vivendi's chairman, steps up his stock buybacks to prop up Vivendi's share price.

-- Dec. 14: Vivendi's board meets to consider the $10 billion acquisition of USA Networks' entertainment assets. Mr. Messier doesn't mention the company's credit rating was nearly cut.

-- Jan. 7, 2002: In effort to lower debt, Vivendi sells 55 million of its shares, or about half of the stock Mr. Messier bought back.

-- March 5: Vivendi announces a $12.7 billion loss for 2001, the biggest in French corporate history.

-- April 24: Mr. Messier confuses his board with a chart on Vivendi's cash flow. Later that day, he promises angry shareholders to keep a lower profile.

-- June 24: Goldman Sachs presents four scenarios to some Vivendi executives and directors, one of which shows Vivendi going bankrupt in September or October.

-- July 3: The board names Jean-Rene Fourtou to replace Mr. Messier. Mr. Fourtou discloses a liquidity crisis.

-- Oct. 29: The Paris public prosecutor's office opens a criminal investigation into Vivendi's financial disclosures under Mr. Messier. h at the National Cancer Institute of the National Institutes of Health