Victory for Time Also May Be a Strategic Victory for Paramount

In the aftermath of a pivotal court decision last Friday, many on Wall Street are betting that Time Inc. will emerge victorious in its effort to drive off Paramount Communications’ hostile takeover bid. But many observers don’t think that would leave Paramount in such bad shape, either.

If Paramount doesn’t turn the tide of the fight, it will have lost the great strategic prize of Time, spent tens of millions in the process and perhaps have made itself a takeover target. Yet it will remain in strong financial condition, with a far higher stock price than before, and it will have succeeded in loading heavy debt on a competitor--the media colossus that results from the merger of Time and Warner Communications.

“Is Paramount coming out of this whipped? I just don’t see it,” said Ellen Greenspan, an arbitrager and head of a New York firm called Ellen Greenspan Advisory.

Of course, Paramount hasn’t sounded the final charge in its legal battle to block Time’s takeover of Warner. Paramount filed its appeal brief with the Delaware Supreme Court on Monday in preparation for a hearing one week later.

And some analysts believe that Paramount still might make a revised bid for the combined Time and Warner, alone or with another partner. Observers don’t rule out the possibility that the publishing and entertainment company’s investment bankers and takeover lawyers might yet come up with a stratagem for gaining control of Time.

But conventional wisdom on Wall Street now is that Paramount has the odds distinctly against it.

Unlikely Purchase

In general, takeover lawyers say, the Delaware Supreme Court has tended to side with defending managements like Time’s more often than the state’s lower-court jurists, such as the chancellor who last Friday gave Time its victory. In a 97-page ruling, Chancellor William T. Allen said it was the prerogative of Time directors to plan a purchase of Warner and reject Paramount’s offer.

And a bid for the combined company would be more risky, far more complicated as well as far more expensive than the offer for Time alone, analysts note. Paramount would have to offer about $30 billion for the company and find a buyer willing to take the pieces of the combined company--including all or most of Warner--that Paramount didn’t want.

In a sign of Wall Street’s skepticism about Paramount’s chances, Time stock retreated $4.25 a share to $141 in Monday’s trading. Paramount shares declined $1.25 to $56.25, as Warner edged up $1.125 on heavy volume to $63.375. With more than 3.5 million shares changing hands, Warner was the second most active issue of the day on the New York Stock Exchange.

Among the negative results of Paramount’s quest for Time is clearly an enormous bill for the services of lawyers, investment bankers, commercial bankers and public relations advisers.

The tally is expected to reach some $70 million, according to Mara Balsbaugh, analyst at the Smith Barney, Harris Upham & Co. investment firm in New York. “That ought to bring on a few lawsuits when shareholders wonder whether it was all really worth it,” she said.

Wall Street also has been rife for weeks with speculation that the offer has made Paramount vulnerable to a takeover. The bid did this by first calling attention to Paramount, and then underscoring the company’s financial strength and borrowing capacity of more than $8 billion, analysts say.

“It’s been like a coming-out party,” said Jeffrey Logsdon, analyst with the Crowell, Weedon & Co. brokerage in Los Angeles. “Paramount’s sort of said, ‘Here I am--anybody want to dance?’ ”

The company will become even more vulnerable once it unloads its big consumer-finance subsidiary, the Associates, which is expected to be sold for about $3 billion in the next few months, analysts say.

A number of companies have been mentioned as possible suitors for Paramount, including several giant European media companies. While there has been no confirmation that these firms are interested, analysts noted that stock trading patterns earlier this month suggested that some investors might, indeed, be accumulating Paramount stock with a view toward a bid.

Some analysts believe that to avoid a hostile offer, Paramount might try to go private, repurchasing its stock from public shareholders in a leveraged buyout. Many more believe that Paramount might try to buy other media or entertainment properties if its run at Time flops, adding debt as a deterrent to a takeover as well as advancing its long-range strategic plans.

Paramount has said it might be interested in any of a number of properties to go with its media and entertainment assets, which include Paramount Pictures, the Simon & Schuster-Prentice Hall publishing companies, TVX Broadcast Group and several cable TV networks.

The company is believed to be most interested in cable TV systems, TV stations and TV programming operations. The cable systems and television stations would complement current operations by, among other things, providing distribution for Paramount’s movies and TV programming.

The company has been rumored to be interested in Tribune Co., which owns television stations and newspapers, and McGraw-Hill, owner of business and trade magazines and information services.

Hollywood Wary

Some observers have asserted that Paramount’s run at Time may harm its relationships with the creative community in Hollywood. Last week, film producer George Lucas wrote a newspaper column denouncing the hostile bid as bad for the country and the entertainment industry.

David Geffen, the music and film executive whose company has long been associated with Warner, predicted that the bid will make Hollywood figures wary of dealings with Paramount Chairman Martin S. Davis.

“This is a world built on relationships, and Davis showed relationships don’t mean much to him,” Geffen said. Executives of Warner and Time have said that Davis had promised them that he would not open a hostile bid for either company.

But an independent Hollywood producer insisted that “this principle may be too abstract for many people here to get excited about--if Paramount has what they’re after, this won’t stand in the way.”

Among the positive outcomes of the fight, from Paramount’s perspective, is that it has lifted a stock price that was stuck stubbornly far below what Paramount executives believed it should be. The company decided to sell its finance arm largely because of that dilemma.

Changes Balance

Also, a merged Time Warner will be carrying more than $14 billion in debt, versus Paramount’s $1.3 billion, notes Christopher Dixon, analyst with the Kidder, Peabody & Co. investment firm in New York.