Liberty Media is in preliminary talks to merge some of its cable-programming interests with Vivendi Universal’s entertainment businesses in a deal that would facilitate a spinoff of Vivendi's entertainment operations and give Liberty a major stake in the combined entity, the Wall Street Journal reports.

Meanwhile, the Los Angeles Times says that Liberty may not be the only suitor. DreamWorks SKG, the 8-year-old entertainment company financed by Microsoft co-founder Paul Allen and owned and run by Steven Spielberg, Jeffrey Katzenberg and David Geffen, has also talked with Barry Diller, Chairman of Vivendi Universal Entertainment, about a possible buyout.

A Liberty-VU deal would create an entertainment giant. Among the holdings would be Vivendi's Universal Studios, Universal Music Group, USA Network, Liberty's Starz and Encore cable networks and Liberty's interest in the Discovery Channel's parent, Discovery Communications.

Such a deal would have two veteran media magnates continuing a long tradition of working hand in glove. Diller likely would manage the new company. Meanwhile, cable pioneer John Malone, the Chairman of Liberty, would have a pivotal role as Liberty would be a major shareholder, the Journal says. Liberty also is already one of the biggest individual shareholders in VU, owning close to 4%, and is a long-term backer of Diller, owning a stake in USA Interactive, his electronic-commerce company.

According to the report, Liberty executives have held exploratory talks with Diller about possible restructuring scenarios for Vivendi's entertainment businesses, and have told Vivendi of their interest as well. Should Malone pull off a deal, Liberty would be in the rare position of owning significant shares in three rival media companies—VU Entertainment, News Corp. and AOL Time Warner.

Other strategic partners for the entertainment businesses also are possible, the people said. And it isn't even clear that VU’s's new Chairman, Jean-Rene Fourtou, has decided what is the best long-term strategy for Vivendi.

The Los Angeles Times says that while other sources at Universal Studios dismissed the idea of a DreamWorks-Universal deal, the studios have a long-standing relationship, with Universal distributing the smaller company's films and housing some of its executives in offices on its lot. Before DreamWorks' formation, Spielberg produced some of his biggest box office hits, including Jaws, E.T. and Jurassic Park, for Universal.

The sale of Universal Studios, estimated to worth at least $20 billion, would go a long way toward solving Vivendi's crippling debt problem. That is, if buyers are willing to pay something close to what the assets are worth.

VUl's shares rocketed more than 22% on Monday (8/19) as investors reacted to word that the conglomerate could secure $2 billion in financing and had entered talks to sell its stake in a money-losing Internet venture.