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SCALING MOUNT PARAMOUNT

Thomas S. Murphy was dining with his wife at New York's Four Seasons restaurant on Sept. 14 when he spied fellow media moguls Sumner M. Redstone and Martin S. Davis at another table. The two were celebrating the proposed $8.2 billion merger of their media companies, Viacom Inc. and Paramount Communications Inc. Murphy, who engineered the 1985 takeover of ABC by Capital Cities Communications, sidled over to congratulate them. As Redstone recalls it, Murphy gave every indication that Capital Cities/ABC Inc. wouldn't disrupt the deal.

Cap Cities may be the only media company that doesn't.

Two weeks after that dinner, Adolph Zukor's fabled Paramount studio has become a chip in a high-stakes poker game involving many of the major players in the media business. First, there's the other suitor: Barry Diller, whose QVC Network Inc. offered $9.5 billion in stock and cash for Paramount on Sept. 20. Then there's Ted Turner, whose Turner Broadcasting System Inc. has mulled its own bid or may get involved in Diller's effort. Finally, there are the third parties: Cable titan John C. Malone and Time Warner Inc., both of whom would gain much by thwarting Redstone.

Sources close to Paramount say its board of directors will meet on Sept. 27 to consider Diller's proposal. And Paramount insiders expect Viacom Chairman Redstone to sweeten his offer, possibly by raising cash from a separate deal with a telephone company. "There is no chance that the existing Viacom proposal will be approved by Paramount's shareholders," says an investment banker in Redstone's camp.

HELL FOR LEATHER. And some Wall Streeters don't think the battle for Paramount--the first hell-for-leather bidding war of the 1990s--will end there. Eager investment bankers see new suitors everywhere they look: In addition to Turner, such companies as Bell Atlantic, Bertelsmann, and Blockbuster Entertainment are all rumored to be interested in all or part of Paramount.

Even if the bidding war remains a showdown between Diller and Redstone, it will have many other participants. With franchises ranging from Madison Square Garden to Star Trek to publisher Simon & Schuster, Paramount is certainly a trophy. But the industry's power players see it as much more: a chance to redraw the communications landscape.

Take Time Warner. With $16 billion in debt and a $2.5 billion deal of its own with U S West Inc., it wants no part of the auction. But Time Warner would like to cash out its 20.6% stake in Turner Broadcasting to pay down its debt. By allowing Turner to stalk Paramount, it could accelerate that process. Antitrust regulations would prohibit Time Warner from holding interests in two companies that run studios. So, if Turner acquired Paramount, he might give some of the assets to Time Warner in return for its stake.

What would Time Warner want? One possibility is Paramount's seven TV stations. "The company is dead set on starting a fifth network," notes Porter Bibb, a media investment banker at Ladenburg Thalmann & Co.

Tele-Communications Inc. CEO John Malone has a similarly complex agenda (page 2834). He's backing Diller's bid by giving QVC $500 million through his cable-programming company, Liberty Media Corp. The home-shopping network's other key investor, Comcast Corp., also plunked down $500 million. But TCI and Comcast own stakes in Turner, too. As members of Turner's board, Malone and Comcast President Brian L. Roberts acquiesced to his request to consider a bid.

Why would Malone sanction a two-horse race? QVC advisers say he may want to bring Turner into the game if the bidding gets pricey. Or Diller could sell some of Paramount's assets to Turner after his deal closes. Hollywood sources say Turner is already interested in Paramount's 50% share of USA Network. Executives close to QVC say Diller and Turner, who met in New York before QVC's bid, are still discussing ways to collaborate.

DEEP POCKETS. Everything hinges on Redstone's next move. Publicly, the Boston billionaire says he will win Paramount with a reasonable bid: "I'm not interested in ending up with a Time Warner." Privately, Redstone has been recruiting allies. He and Davis met with a telephone company on Sept. 20 to discuss selling a stake in Viacom's cable systems. Redstone could use the cash from such a deal to finance a higher bid. Before his Paramount offer, he scuttled a similar deal with Southwestern Bell worth $2.4 billion.

But Redstone may not need a partner. His 76% stake in Viacom is worth $5 billion. Plus, he's the sole owner of the theater chain National Amusements Inc. and all the real estate under its cinemas. Together, this is worth hundreds of millions more. Raymond Katz, a media analyst at Lehman Brothers Inc., says if Redstone were willing to saddle Paramount Viacom with $7.8 billion in debt--still a manageable amount--he could boost the cash portion of his bid from $9 to $45 a share, for a total offer of almost $100 per share.

The bigger question is: Would he want to? The lockup provisions in his deal guarantee Redstone a huge windfall even if he concedes to Diller. Among other things, Viacom has an option to buy 20% of Paramount's stock at $69 a share. To buy out Redstone, Diller would have to pay him the difference between $69 and the winning bid. At $80 a share, that's a cool $264 million.

For now, Diller's investment bankers at Allen & Co. are exuding confidence. Even though the QVC bid already includes $3.5 billion in cash, Diller has the combined strength of three balance sheets: QVC's, Liberty Media's, and Comcast's. Unlike Viacom, which has $2.4 billion in debt, QVC carries almost no debt and will generate upwards of $200 million in operating cash flow in 1993. Says one banker: "Raising $5 billion would be easy. Raising $10 billion might be a stretch."

Redstone's strategy is simple: portray Viacom as a better fit for Paramount than QVC and suggest that Malone is a regulatory liability for Diller. On the first point, he may have a case. Paramount could make a Ren & Stimpy film, for example. But could Diller harness Star Trek: Deep Space Nine to sell jewelry? In recent interviews, Diller has played down the fusion of electronic retailing with entertainment.

Diller may also have his hands full just running QVC. The network's operating margin dropped from 11% in fiscal 1992 to 9% in the first half of 1993. And observers say Diller has faced a higher return rate on some of the more upscale merchandise QVC has offered since he took over. At the same time, Diller has a pending merger with archrival Home Shopping Network.

Despite its epic cast, the Paramount saga is regarded by many observers as a mano-a-mano battle between foes Barry Diller and Marty Davis. "Diller is younger and stronger and more determined," says Ladenburg's Bibb. Perhaps. Then again, they don't come any stronger or more determined than 70-year-old Sumner Redstone.QVC NETWORK

Chairman Barry Diller wants to use Paramount's movie studio and

TV-programming arm to launch a fifth broadcast network.

OPERATING CASH FLOW:

$101.6 million

TOTAL DEBT:

$7.5 million

CURRENT MARKET VALUE:

$3.01 billion

*1992 results

VIACOM

Majority owner Sumner Redstone wants a studio to turn his midsize

media company into global multimedia giant.

OPERATING CASH FLOW:

$371.0 million

TOTAL DEBT:

$2.4 billion

CURRENT MARKET VALUE:

$6.94 billion

WILD CARDS

Ted Turner may still want a studio. More likely, he could use his

involvement in a Diller bid as a way to buy out one of Turner

Broadcasting System's key shareholders, Time Warner. Diller's backers,

John Malone of TCI and Brian Roberts of Comcast, could use Turner as

an extra lever if Redstone tops QVC's current bid.

DATA: BUSINESS WEEK

Mark Landler in New York, with Ronald Grover in Los Angeles and Gail DeGeorge in Miami


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