John Malone's Liberty Media has reportedly begun exploratory talks with Vivendi Universal with a view to merging some of his cable TV interests with the US entertainment businesses of the beleagured French conglomerate. The combined operation, which would bring Universal Studios, Focus Films and USA Networks under the same roof as the Starz/Encore pay-TV group and the Discovery Channel, would then be spun off in a public float.

Vivendi Universal chief executive Jean Rene Fourtou insisted on Monday (Aug 19) that his company's US entertainment businesses - currently housed under Barry Diller's Vivendi Universal Entertainment (VUE) division - would not be among the $10bn worth of assets that he is looking to unload immediately as he tries to dig himself out a massive financial hole.

However, it now emerges that Vivendi Universal is examining whether to unlock the value of VUE through an Initial Public Offering (IPO) that would be timed presumably to take advantage of any rebound in the currently depressed value of media stocks on Wall Street.

As a precursor to such an IPO, the Wall Street Journal reported that Liberty, which already owns 3.5% of Vivendi Universal, is discussing folding in its stakes in Discovery Communications and the Starz/Encore pay-TV group as a way of enhancing VUE's collective value for investors. Diller, a close associate of Malone's, would run the newly spun-off business, finally freeing Vivendi of the logistical nightmare of trying to run a Hollywood empire from Paris.

Disposing of VUE outright is seen as a less likely option for Fourtou since most viable buing candidates - rival studio conglomerates - would encounter stiff anti-trust hurdles even if an optimum price could be extracted from them. Because of its relatively smallish size, DreamWorks SKG is seen by analysts as the one company that could feasibly make a merger or takeover play for Universal Studios, assuming it was able to raise the necessary financing.The two companies have a long history together: prior to forming Dreamworks, Steven Spielberg produced some of his biggest films for Universal and the studio already distributes Dreamworks' films theatrically overseas through UIP.

Vivendi shares jumped over 11% on Tuesday to close at Euros12.70 on Paris as investors reacted to the first real signs that Vivendi Universal might finally be disentangling its global sprawl while at the same time shedding its debt load.