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The Fat Lady Hasn't Sung At Paramount


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THE FAT LADY HASN'T SUNG AT PARAMOUNT

Sumner M. Redstone's grandchildren call him Grumpy. And on Jan. 10, the chairman of Viacom Inc. was living up to his nickname. Three days earlier, Redstone had made his boldest move yet in the battle for Paramount Communications Inc., only to be pelted with insults on Wall Street. Now, as he defended the proposed deal in an interview with BUSINESS WEEK, Redstone didn't bother to hide his irritation. "When the other side takes a position, it's treated as rational and thoughtful," he groused. "But when we do the same thing, it's somehow not treated that way."

The veteran dealmaker contends that his new bid for Paramount is eminently rational. For starters, he has raised the cash in his offer from $85 to $105 a share, surpassing the $92 that was offered by rival QVC Network Inc.

His goal was to satisfy Paramount shareholders and arbitrageurs, who had voiced a preference for QVC's sweeter cash component. To finance the bid, Redstone is getting an additional $1.25 billion from Blockbuster Entertainment Corp., which already had kicked in $600 million. And in return for Blockbuster's generosity, Viacom will merge with the home-video giant in a stock swap that values the company at $8.4 billion.

"DESPERATION MOVE." But virtually everyone dislikes the deal--from the arbs to the shareholders of Viacom and Blockbuster. Some people accuse Blockbuster Chairman H. Wayne Huizenga of selling out his company for a meager 10% premium. Others say Redstone, out of hunger for Paramount, has yoked his fast-growing company to an outmoded retailer. "Sumner's merger is a desperation move to stay in the game," says a major investor in Viacom and Paramount.

Worst of all, because of its poorer stock component, Viacom's overall bid is actually $750 million less than QVC's (table). QVC says Viacom simply tossed off a confusing 11th-hour bid to prevent Chairman Barry Diller from clinching his deal. And on Jan. 12, Paramount's board recommended that shareholders reject Viacom's new offer.

So Redstone really blew it, right? Maybe not. Sure, Viacom irked Wall Street by springing its new bid minutes before the Jan. 7 deadline set by Paramount's board. But Redstone did buy himself 10 more days. Now, with Viacom and QVC stock prices seesawing as each takes a perceived lead in the battle, Redstone's offer could end up matching QVC's by Jan. 21. If it doesn't, he may yet boost the stock offer.

More important, Redstone is resisting a 1980s impulse to shoot the moon. "Our job is to win this with a reasonable offer," says Frank J. Biondi Jr., the Viacom CEO. Diller shares those sentiments: He says that Paramount is "fully valued." As a result, when the gavel finally falls, Paramount will likely fetch around $80 a share. Who will be hurt by this? Only the arbitrageurs, who bet on a further round of bids.

If Redstone does win, the Blockbuster merger will make the Paramount acquisition more fiscally manageable. With $410 million in 1993 operating earnings, Blockbuster would serve as a handy cash generator for a company that would lumber under $9 billion in debt. Without Blockbuster, Paramount-Viacom's 1993 cash flow would cover the interest payments only 2.3 times. Add in Blockbuster, and the ratio jumps to 3 times. "Viacom is doing this for financial strength, not strategic reasons," says Lisbeth R. Barron, a media analyst at S.G. Warburg & Co.

CLOUT. Even though the synergies between Viacom and Blockbuster aren't exactly scintillating, the two do complement each other in a few areas. By teaming up with the No.1 video retailer, Viacom gains clout with studios for rights to movies. That could bolster its Showtime pay-TV service.

It is Huizenga, in fact, who has the tougher sales job. Several Blockbuster shareholders have already filed lawsuits, contending that he didn't command enough of a premium for giving up control. Huizenga, who will become vice-chairman, argues that Viacom-Blockbuster's assets give Blockbuster shareholders the chance to reap far more than a 10% premium in the long term. "If I didn't think it was a wonderful deal, why would I have given up control?" he asks.

With the battle in its last stages and with neither bidder willing to pay any more in cash, the Paramount stockholders must now ask themselves the logical next question: Do the broader assets of Viacom-Blockbuster outweigh the wizardry of Barry Diller? Everything else, as Diller himself would say, is just "noise."Mark Landler


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