Viacom Seeks a Role in the Land of Media Giants : Entertainment: The cable, TV and radio company has reduced its daunting debt. But can it survive the competitive jungle?

Shortly after his 63rd birthday, Sumner M. Redstone decided to take a flyer. He gave up a quiet New England life to acquire Viacom International, the media company best known for cable networks such as Nickelodeon and MTV.

Running his campaign from a room at the Carlyle Hotel in Manhattan, Redstone persuaded banks to lend two-thirds of the $3.2 billion purchase price. It was no simple feat, because bankers tend to be a nervous lot and there was no proof that the Boston movie-theater owner could run a conglomerate. They warned Redstone that he would have to repay $450 million within two years.

He has more than met the short-term goals. The company--renamed Viacom Inc.--recently shook off bankers’ restrictions and is beginning to acquire new properties, including Los Angeles radio station KJOI-FM.

“My instincts were right,” Redstone says, 2 1/2 years after the takeover. “This company was a sleeping giant, even though I didn’t understand all of its businesses, or any of its businesses in depth.” Redstone gives much of the credit to the management team assembled by his 44-year-old chief executive, Frank J. Biondi Jr., a former Coca-Cola television executive and former chairman of Home Box Office unit of Time Warner Inc.

There were no layoffs, and half of Viacom’s bank debt has been repaid with surprisingly few asset sales and adroit borrowing from other sources at better terms.

Luck also played a role, and Redstone admits it.

Prices soared for cable television systems, enabling Viacom to sell its Long Island and Cleveland systems for more than double the amount discussed two years earlier. Earnings spurted for MTV Networks, the Viacom unit comprised of four ad-supported cable services. In television, the company struck gold with its deal to distribute the reruns of the popular “Cosby Show.”

But even with these successes, the company’s destiny as a “giant” is open to debate. Larger competitors loom over Viacom in three of its four businesses: TV and radio stations, cable TV systems and television programming syndication and production. In cable TV programming, Viacom has the most networks--including Showtime and the Movie Channel--but must worry about HBO, the industry gorilla that launched a new comedy channel last week and has the resources to do a great deal more.

Critics and admirers alike can rightly ask where Viacom will be five years from now, surrounded as it is by newly merged Time Warner Inc. and by large Hollywood studios owned by still larger international conglomerates, such as Sony Corp. and Rupert Murdoch’s News Corp.

In the short run, a merger for Viacom appears improbable because of the leveraged buyout debt that it still carries and because of Redstone’s 83% stake, which would likely assure him control of a merged entity--distasteful to strong-minded suitors.

To compound the challenge, Viacom is fighting two enemy camps at the same time. On the eastern front, Viacom has filed a $2.4-billion antitrust lawsuit against Home Box Office, while in the West, Viacom has antagonized two of Hollywood’s most formidable studios that supply movies for its cable TV networks. Paramount Pictures has sued Viacom for failing to pay $88 million allegedly owed for a batch of recent movies, and MCA Inc. is deeply annoyed that it has been unable to negotiate a lucrative pay-TV deal with the Showtime Networks unit.

“It’s not clear where (Redstone) is going,” says Gordon Crawford, a veteran entertainment industry analyst at Capital Research Co. in Los Angeles, which once held 10% of Viacom’s stock. “I just think he makes life difficult for himself. You need other people’s cooperation. You want to start a new cable channel? You need the cable operators’ cooperation. You want a new program, you need the programmer’s good will.”

Redstone insists that he acquired Viacom because he wants to build a great media company. “It’s likely that we’re going to be somewhat larger than we are today; I can say with certainty that we’re going to be better.”

But a rival company executive says bluntly: “Where he’s going to be in five years is more (a question of) estate planning.” Even though Viacom shares are traded on the American Stock Exchange, Viacom is essentially “a private business run by one man,” the executive says. “I don’t think he thinks like an institution. At some point he has to resolve his life and his assets,” the executive says, predicting that Viacom ultimately “will be carved up.”

In addition to its cable networks, Viacom has plenty of assets that would be snapped up. In television programming syndication, Viacom is the largest “independent” supplier, although it trails major Hollywood studios such as Warner and Columbia. The company ranks 15th in cable TV system subscribers. It owns five TV stations affiliated with NBC or CBS, although only two are in Top 50 markets. In radio, the company ranked 15th largest in revenue last year, but pending acquisitions in California and Denver should boost Viacom to the top 10, according to industry analyst James H. Duncan Jr.

Redstone insists that he’s in the business for the long haul. “All my planning is predicated toward keeping this company going . . . with the hope and expectation that the company will continue after me.” The 66-year-old chairman says he wants to pass on Viacom intact to “family and some significant charities.” Redstone’s son and daughter--both attorneys in their 30s--have an open invitation to join the company, although sources indicate that no such development is imminent. In any event, Redstone says he’ll retain professional management.

The Viacom chairman is self-congratulatory about his recruitment of Biondi as chief executive. In style and temperament, they complement each other, and Biondi almost admits to a “good cop, bad cop” routine.

“Sumner is a lawyer whose passion is on the surface, who . . . doesn’t accept any of the conventional wisdom at face value,” says Neil S. Braun, a Viacom senior vice president who juggles administrative tasks as well as overseeing Viacom’s new venture in low-budget films. “Frank is much more cool-headed. He is much more even-keeled . . . and really cares much less about the last 10% (in a negotiation).”

The Viacom job pits Biondi directly against the former Time employers who ended his HBO career in 1984 after a quarrel over Home Box Office’s direction. Biondi makes little effort to disguise his animus toward some of Time Warner’s top executives or the tatters of the friendship that he once had with current HBO Chairman Michael J. Fuchs.

“Time is a very proud place, and they’re very macho,” Biondi says of the aftermath of his battles, which shoved aside another high-level colleague, Winston H. (Tony) Cox. “They more or less hoped we’d go away, fall on our face.”

Instead, Biondi landed comfortably at Coca-Cola, where he negotiated the purchase of some key television companies, and then at Viacom, where he recruited Cox and at least half a dozen former HBO colleagues.

All of the top Viacom officers appear to be handsomely paid. Biondi received $1.15 million in cash compensation last year, and under his five-year contract he receives 240,000 so-called phantom shares. Under a phantom stock plan, an executive pays nothing for the hypothetical stock but stands to gain a bonus if the real stock price rises. With phantom shares priced $17.50 to $21.50, Biondi stands to gain a future bonus of about $11 million at Viacom’s 52-week high of $65.25. (On Friday, the stock closed $60.375, up $1.125.)

With those financial incentives, the Viacom executives who came from Home Box Office publicly tease some of their old colleagues. “We put our arm around them and say, ‘Hey, how’d you like your salary to go up 20%?’ ” Biondi says.

Some HBO insiders say bedevilment was the motive for Viacom’s declared plan to launch a 24-hour comedy network next spring to compete with HBO’s new “Comedy Channel.”

“If they think we’re trying to just hold them up, they’ve got to be worried,” says Biondi, adding with faint disdain: “Michael (Fuchs) takes the position that somehow he was able to stake out comedy as an idea. And therefore he has the high ground, morally.”

For either side, a 24-hour comedy channel is a costly gamble. Biondi estimates that the undertaking will lose $100 million to $120 million before turning the corner. For that reason, Viacom is offering to sell up to 50% in the new network to cable operators, and Biondi appears amused by reports that HBO is now mimicking the Viacom strategy.

Both Home Box Office and Viacom are eager to develop advertising-supported, or so-called basic, cable services because profits are harder to squeeze out of the pay-cable, or subscription-dependent, services such as Showtime, the Movie Channel, HBO and its sister service, Cinemax. The pay cable industry generates $5 billion in revenue at the “retail” level but pockets less than $200 million in pretax earnings after paying for Hollywood movies and original programming and sharing the revenue with local cable operators, Fuchs noted recently.

Cable operators are not enjoying the Viacom-Time Warner fight on any level. They’re under pressure to decide which comedy channel to support, and in the short run their profits will be squeezed while they pay for the new service. For some operators, there is an added annoyance of making room for the new service on cable systems with scarce channel capacity.

Tele-Communications Inc., the largest cable operator with nearly 25% of the nation’s subscribers, has waded into the feud and apparently suggested that the two rivals operate one comedy channel jointly. According to industry sources, the suggestion is part of a campaign mounted by TCI Chief Executive John C. Malone to resolve the Viacom antitrust suit against Time Warner. Malone has a keen interest in resolving the fracas because HBO has threatened to sue TCI over Malone’s plan to buy 50% of Showtime from Viacom.

Because TCI is his largest customer, HBO’s Fuchs has made no secret of his displeasure. “Really, things could be a lot worse,” he told other executives at a Bear, Stearns & Co. entertainment industry conference last month. “Let’s say John Malone was in the airline business. Then he would be acquiring most of the air in the world.”

The mudslinging among its leaders has set the cable industry on edge because of the fear that politicians in Washington will reimpose curbs such as rate regulation. Viacom has been the target of most of the criticism because it initiated the antitrust suit.

“From the cable industry’s point of view, they’re not being statesmanlike. They give fuel to the government types like (Massachusetts Democratic Rep. Edward J.) Markey and (Michigan Democratic Rep. John D.) Dingell . . . who are gung-ho for re-regulation,” says Sharon Armbrust, a industry analyst with Paul Kagan Associates in Carmel.

But the lawsuit is characteristic of Redstone, who once practiced antitrust law in Washington and seldom backs down from a fight. In the lawsuit, filed in May, Viacom alleged that Time had used its cable systems and HBO unit to “entrench themselves as monopolists.”

“Sumner came in from the outside and said . . . ‘In the movie industry, you go to jail for doing this,’ ” Biondi says. “He was, in essence, trying to convince us that what was going on was not just custom but was wrong.”

Biondi shrugs off the question of whether the practices originated during his own HBO tenure. “It was getting worse,” he says. Time-owned cable systems have excluded Viacom’s pay services in eight or nine markets, he contends, and in some competitive situations, Home Box Office has priced its service “below marginal cost simply to drive Showtime units out.”

The lawsuit allegations have been denied by Time Warner.

Redstone insisted on a consensus among his top executives before filing the antitrust action, Biondi says, just as a consensus was reached to sell assets when Viacom needed to reduce its debt.

“For example, Sumner at the beginning didn’t want to sell assets,” Biondi recalls, but “there really was too much debt in absolute size to grow out of it.” Even though Redstone wanted to keep all of Viacom’s TV stations for their diversity and stability, he allowed Viacom executives to put the Hartford, Conn., station up for sale. (Later, the station was pulled off the market when it became apparent that prices had softened.)

The sale of the Long Island and Cleveland cable systems early this year brought in $545 million, on top of $500 million raised last year from the sale of junk bonds and the $44-million sale of Orion Pictures stock. In March, Viacom swapped its preferred stock for a form of debt, to avoid paying dividends that are not tax deductible.

Six weeks ago, Viacom shook off the bank-imposed restrictions of its original lending deal. Viacom no longer has to seek bankers’ permission to buy new businesses, and in the past month, the company has reached deals to acquire five radio stations for $120 million. “We like radio,” Biondi says, and competitors and analysts say the Viacom radio managers have done a good job in their various markets.

Indeed, Redstone claims one of his happiest discoveries was the strength of Viacom’s middle management, which remained largely intact after Biondi brought in his own executive team.

“One of the reasons for Viacom’s success is the ability of this management team to deal with the company’s fundamental assets and to grow them and make them more exciting,” Redstone says, pointing to the MTV and Nickelodeon networks as examples.

Upon arrival, Biondi was baffled to find the two services “dead in the water” despite their unique niches in the marketplace. Following a hunch and recalling Coca-Cola’s enthusiasm for the networks as an advertising vehicle, Biondi ousted the advertising team for “arrogance” and asked MTV insider Tom Freston to run MTV Networks, which includes all of Viacom’s basic networks.

“A lot of the people are the same, but they’re in different jobs; it looks very different and feels different and it’s about twice as big as it was two years ago,” Biondi says.

In turn, the television syndication team proved its mettle when Viacom began licensing “The Cosby Show” reruns. At the time, many independent TV stations balked at the asking price because they had taken on too much debt in leveraged buyouts or paid too much for other programming, so the Viacom salesmen persuaded network affiliates to bid as well. The tactic worked and helped drive up the price, resulting in deals worth $515 million to Viacom over 3 1/2 years, plus barter advertising revenue.

“The rap around town was, ‘Wonder what that mediocre sales force will be able to do with (Cosby),’ ” recalls a television executive at a major Hollywood studio. “Everybody had to eat their words, because they came with a plan and a strategy that worked just fine, thank you.”

VIACOM’S CABLE TV NETWORKS Basic and pay cable services and subscribers, in millions, as of April, 1989.

BASIC CABLE SERVICES MTV (Music Television): 45.7

Nickelodeon: 45.5

Nick at Night: 41.7

VH-1 (Video Hits One): 31.8

PAY CABLE SERVICES Showtime: 6.7

The Movie Channel: 2.7

Source: National Cable Television Assn.

KEY FINANCIAL EVENTS FOR VIACOM June, 1988: Sells Orion Pictures common stock, raising $44 million July, 1988: Issues $500 million of senior subordinate debentures (junk bonds) February, 1989: Sells Long Island and suburban Cleveland cable TV systems for $545 million March, 1989: Exchanges all preferred stock for junior subordinated exchange debentures October, 1989: Reached new $1.5-billion borrowing agreement with banks VIACOM’S BUSINESS MIX TV programming, syndication and production: 12.6% Cable TV systems: 25.9% Cable TV networks: 50.4% TV and radio stations: 11.1% Total 1988 revenue: $1.3 billion