Viacom to Buy MTV and Showtime in Deal Worth $667.5 Million

Viacom International, one of the nation’s largest distributors of television programming and a large owner of cable-television systems, on Monday agreed to steps that will give it 100% ownership of both MTV, an operator of cable music channels, and Showtime/The Movie Channel, a pay-TV service.

Under a complex arrangement, Viacom will spend more than $667.5 million to purchase the combined 50% interest in Showtime currently held by Warner Communications and Warner-Amex Cable, as well as Warner-Amex’s two-thirds stake in MTV and the remaining one-third of MTV held by public shareholders. Viacom already owns 50% of Showtime, which it founded in 1976.

The deal gives Warner enough cash to pay for its planned $450-million buy-out of American Express’ share of Warner-Amex Cable without borrowing any money, as well as a healthy premium over the previous offer for MTV. That was a $310-million buy-out bid from Forstmann, Little & Co., a New York firm specializing in leveraged buy-outs. The terms of the Viacom deal indicate that Warner will get $340 million for Warner-Amex’s share of MTV.

Could Turn Quick Profit

Warner also will get warrants enabling it to buy up to 10% of Viacom over the next five years at $70 and $75 per share. Analysts view that provision chiefly as a way for Warner to retain an interest in the future growth of MTV and Showtime. If Viacom becomes a takeover target, as some analysts believe it might, Warner could turn a swift profit from its warrants of as much as $50 million.

Viacom shares closed Monday at $50.75, up 25 cents on the New York Stock Exchange. Warner shares closed at $29.75, off 25 cents.

The sale instantly makes Viacom the nation’s sixth-largest provider of cable-television programming. MTV, the pioneering provider of music-video programming for cable systems, has about 26 million subscribers. Of MTV’s two other networks, VH-1 (for Video Hits-One), a service aimed at the 25- to 54-year-old audience, reaches 8 million households, and Nickelodeon, aimed at children, reaches 25 million. Showtime/The Movie Channel distributes movie and special-production programming and has about 8.5 million subscribers.

The largest cable programming distributor, according to Paul Kagan, a Carmel cable and broadcast industry consultant, is ESPN, mainly a sports programming service, which reaches 35.7 million subscribers.

“From the cable system operator’s standpoint, this makes Viacom a much more powerful entity to deal with,” said Mara R. Miesnieks, a cable industry analyst for Smith Barney, Harris Upham & Co. Miesnieks and other Wall Street analysts said the potential profits for Viacom more than outweigh the sale price’s probable dilution of the company’s earnings in 1986 of as much as 40 cents to 50 cents per share.

Premium on Initial Price

Viacom’s proposed purchase of the public’s one-third interest in MTV for $33.50 per share also represents a sharp premium for many holders of that stock, which was initially offered scarcely a year ago at $14 per share.

Announcement of the Viacom purchase comes two days after the collapse of Warner’s negotiations with Forstmann, Little. Those talks reportedly broke down over Warner’s desire to retain an option to repurchase about 20% of the rock-music cable programmer. Warner earlier had announced that it had reached an agreement giving it the right for 90 days to sell Viacom Warner-Amex’s share of MTV for $310 million.

According to terms of the purchase disclosed Monday, Viacom will pay Warner $500 million in cash and issue to Warner warrants to acquire 1.625 million shares of Viacom at $70 a share. That will cover Warner’s 31% stake in Showtime/The Movie Channel, an additional 19% of Showtime/The Movie Channel owned by Warner-Amex and the two-thirds stake in MTV Networks that is owned by Warner-Amex.

Warner also will acquire warrants for $9.75 each to buy another 625,000 shares of Viacom’s common stock at $75 per share. All warrants are exercisable over a five-year period and are subject to certain restrictions, the companies said. Exercising all the warrants would give Warner about 10% of Viacom, but, because Viacom is trading at about $50 per share, Warner is not expected to immediately exercise its purchase rights.