(FORTUNE Magazine) – "It's a very complicated transaction," says Barry Diller, after unveiling a deal with his old friend Edgar Bronfman Jr. that gives him control of the TV operations of Seagram's Universal Studios. That's putting it mildly. This deal is so convoluted that some reporters couldn't figure out who was buying and who was selling. But strip away the complexities, and the core of the deal looks simpler: It's a bold attempt to create a new kind of TV network, a high-stakes bet on Diller, and a setback for his longtime adversary, Universal CEO Frank Biondi.

Yes, it's Diller time again, and Hollywood's aflutter. Critics say the notoriously tough Diller, 55, snookered the gentlemanly Bronfman, Seagram's 42-year-old CEO, who is giving up control of prized assets like Universal's once prolific TV production studio and two moneymaking cable networks, USA Network and the Sci-Fi Channel. "It's an admission on Universal's part that they don't know how to do television," said an industry veteran. Maybe so, but it's also a sign of Bronfman's ingenuity. He's managed to hire the man who wouldn't be hired: Diller vowed he'd never be an employee after toiling for Martin Davis as chairman of Paramount Pictures and building the Fox network for Rupert Murdoch. What's more, Bronfman secured Diller's services without really selling anything. On the contrary, once this deal plays itself out, he'll actually be the buyer.

Universal will sell its TV studio, USA Network, and Sci-Fi to Diller's Home Shopping Networks Inc. (HSN), which now consists of two shopping networks, 25 UHF TV stations, and a controlling stake in Ticketmaster. In return, Universal gets $1.2 billion in cash and a 45% interest in the new bulked-up HSN, to be renamed USA Networks Inc. The twist: Bronfman can buy up to 80% of the new entity in four years or when Diller leaves. "This deal would not have happened unless there was a clear path for us to regain the asset," Bronfman says. So Universal will end up with everything it has now, plus Diller's company.

In the meantime, Diller gets what he wants: absolute control. He's got the right to vote Universal's shares as well as shares held by Liberty Media, a cable-programming company controlled by another of his mogul pals, Tele-Communications Inc. CEO John Malone. Liberty will own between 15% and 25% of USA Networks Inc. If Diller exercises all his options, he'll hold another 8%, worth $560 million at today's valuations--not bad for someone who, before the deal, ran a second-tier shopping channel and a collection of third-rate TV stations. "This is an extraordinary deal for Barry Diller, because he didn't bring a lot to the table," said a cable industry rival. "The real asset here, in Edgar's mind, is probably Barry Diller."

In fact, Bronfman would have loved to have hired Diller when Seagram bought Universal in 1995. ("I knew I couldn't," he says. "So I didn't ask.") Instead, he brought in Biondi and stayed close to Diller, who, after failing in his bids to take over Paramount and CBS, was fixing the Home Shopping Network for Malone and plotting a return to a bigger stage.

Now he's back with a plan to combine underperforming assets--the USA Network and his UHF TV stations--into the first entertainment network to be delivered over cable and broadcast. It's an intriguing idea: the stations will mix their local news and information programming with USA's original shows, offered on different days and times, allowing for plenty of cross-promotion between cable and broadcast. A key goal is to expand the distribution of USA and lift advertising rates for cable, which has always been penalized for lack of reach and efficiency. "We are going to go for large circulation, or fail trying," says Diller. Whether his weak TV outlets will add much is questionable.

Until last year, USA, which reaches 73 million homes, was cable's most watched network in prime time--a remarkable feat, because the channel for years was owned by two studios, Universal and Paramount, which often used USA as a dumping ground for their lousy shows. The channel still lacks a strong identity and is driven mostly by reruns of broadcast hits like Walker, Texas Ranger. And its cash flow of $200 million a year is less than the earnings of networks like Viacom's MTV. Says Kay Koplovitz, USA's longtime CEO: "I know we could and should be a much larger company."

If nothing else, Diller proved at Fox that he can create distinctive shows and brand a network. He won't say much about his programming ideas but notes: "USA has been very understrategized. I've always thought, 'Wow, what an opportunity.' "

Meanwhile, Biondi is the odd man out. A respected cable veteran, he looked forward to taking command of USA and Sci-Fi when Universal bought out Paramount's interest last month. There's also no love lost between him and Diller; after battling over Paramount, Biondi fired Simon & Schuster chief Dick Snyder, a Diller pal. Biondi, with his usual grace, says the Diller deal makes sense. Seagram gets $1.2 billion to buy new assets or repurchase shares. Just as important, Bronfman and Biondi should get credit on Wall Street for creating value at Universal, which was taking on water when they assumed control.

--Marc Gunther