Warner Will Buy Rest of Cable Firm : Also Has Option to Sell Its Interest in MTV to Viacom

Warner Communications said Friday that it will buy American Express’ 50% interest in their joint venture, Warner-Amex Cable Communications, for $450 million and assume Warner-Amex’s debt of about $500 million.

Warner said a consortium of banks, headed by Bank of Boston, has committed to lend the funds needed to complete the acquisition. The loan will be made to a cable subsidiary of Warner.

Warner also said that it has entered into an agreement with Viacom International, a major New York-based cable-programming firm, giving Warner the right for 90 days to sell Viacom Warner-Amex’s two-thirds interest in MTV Networks for $310 million in cash.

If Warner exercises that right, Viacom could then follow one of two courses: It could buy only the MTV shares, or it could exercise an option to buy American Express’ former Warner-Amex stake, with certain exclusions, for $450 million in cash.

In the latter option, Viacom would not buy Warner-Amex’s 19% stake in Showtime/The Movie Channel.

Owns Half of Warner-Amex

The second option would result in a Warner-Viacom joint venture. Each would own one-third of MTV Networks, with public shareholders owning the remaining one-third. Each would also own one-half of Warner-Amex and Showtime/The Movie Channel. Viacom already owns half of Showtime/The Movie Channel.

Warner’s announcement came a day after the New York investment firm of Forstmann, Little & Co. and a group of MTV Networks executives made an offer to take MTV Networks private through a leveraged buy-out. In a leveraged buy-out, a company is acquired largely with borrowed funds that are repaid either from the target company’s operating revenue or from the sale of its assets.

The Forstmann, Little offer of $31 a share is equivalent to $310 million for Warner-Amex’s two-thirds share in MTV Networks, plus another $160 million for the one-third interest held by the public.

The Forstmann, Little offer was made on the assumption that Warner would acquire American Express’ 50% stake in the joint venture. “The only way the leveraged buy-out could work is if we did what we did today,” a Warner spokesman said. “So that deal (the Forstmann, Little offer) is not precluded, it’s still an open option.”

The transaction involving Warner-Amex was touched off in May when Time Inc. and Denver-based Tele-Communications Inc. offered to buy the company, which ranks as the nation’s fifth-largest cable-TV operator. Although Warner appeared reluctant to sell, American Express was eager.

American Express, which reportedly has been trying to get out of Warner-Amex for some time, thus offered to pay Warner $450 million for its half of the cable-TV venture, triggering an agreement under which Warner either had to accept the offer or match it by buying out American Express. Under terms of the buy-sell agreement, Warner had only until Aug. 14 to make a decision.

Sources previously said that Time and Tele-Communications were gambling that Warner would accept their offer in order to buy out and thus rid the company of its largest shareholder, Chris-Craft Industries, which holds 29.5% of Warner.

Although Warner’s action Friday went in the other direction, the deal with Viacom allows Warner to sell assets in case it later needs funds. The company would actually increase its interest in Showtime/The Movie Channel.

According to cable industry analyst Paul Kagan, the complicated chain of financial maneuvers boils down to this: “Warner is saying to Viacom, if we need you to be our ‘white knight’ and buy MTV, we will reward you for being there by letting you buy half the cable company.”

In a separate announcement, Forstmann, Little confirmed Friday that its offer for MTV Networks was made in association with a group of MTV executives that includes Chief Executive David H. Horowitz and Executive Vice President Robert W. Pittman. Forstmann, Little had not previously named the executives involved.