Viacom Inc. and Paramount Communications Inc. solemnized their vows Sunday, with the two boards approving a merger agreement that gives Viacom Chairman Sumner M. Redstone an astounding 69% of the voting stock: a degree of control seemingly unparalleled for a publicly held entertainment conglomerate.
The deal ends a remarkable four-year saga that began with Paramount in the driver’s seat, but ended quite differently. Redstone bided his time and saw Viacom grow exponentially with its MTV and Nickelodeon cable TV networks, outstripping Paramount’s value on Wall Street. That turn of events enabled Viacom to acquire Paramount in the stock-and-cash deal valued at $8.2 billion.
With new shares being issued, the combined company will have a market value of $18 billion (including debt), based on Friday’s closing stock prices, which rose on rumors of merger talks.
As a parable, Viacom’s story illustrates how the boom in new media technologies has given some cable TV companies an edge over more traditional entertainment companies that have failed to expand into high-growth businesses quickly enough.
The deal approved Sunday creates a mega-company that will be known as Paramount Viacom International, with assets that include Paramount Pictures, a giant publishing unit, radio and TV stations as well as cable TV systems. Additionally, Paramount’s movie theaters--if combined with Redstone’s privately held National Amusements theaters--would become the second-largest chain in the country.
Paramount Chairman and Chief Executive Martin S. Davis, 66, will become chief executive of the new company, while the 70-year-old Redstone will serve as chairman. The title of chief operating officer has not been awarded yet, but Viacom President Frank J. Biondi Jr. and Paramount President Stanley Jaffe will both serve on a transitional team.
The deal, first confirmed by The Times on Saturday, will be structured as an acquisition, using two classes of Viacom stock as well as cash. Certain “lockup” provisions in the acquisition are designed to discourage any attempts to break up the merger, which could close within four months. The transaction still requires approval of Paramount shareholders.
Under the terms of the definitive merger agreement announced Sunday, Paramount shareholders will receive about $69.14 per share in cash and stock. For each Paramount share, Viacom will issue 0.1 of its Class A (voting) stock and 0.9 Class B stock, as well as $9.10 in cash.
Some Wall Street analysts said the price for Paramount is higher than expected. S.G. Warburg’s Lisbeth R. Barron called it a “preemptive bid” designed to discourage rivals--particularly Barry Diller, the QVC Network chairman who reportedly has eyed Paramount as a possible takeover target.
Indeed, Hollywood and Wall Street have buzzed with speculation that Paramount finally acceded to the Viacom deal because it was worried that Diller or his ally, Tele-Communications Inc. Chief Executive John Malone, might launch an unfriendly takeover.
But in an interview Sunday, Redstone said: “Martin has never had any fear of those people. We’re not concerned about them.”
Nevertheless, the merger agreement has two lock-up provisions. Paramount has granted Viacom an option to acquire about 20% of its stock, and Paramount must pay Viacom $100 million if the deal is scrapped.
In a joint interview, Redstone and Davis acknowledged merger talks dating back at least four years. Two of Wall Street’s most powerful investment bankers--Allen & Co.'s Herbert A. Allen and Bear Stearns’ Alan (Ace) Greenberg each attempted to bring the companies together.
Recalling those earlier talks, one source said that Paramount repeatedly explained to Redstone that it would pay a premium for his controlling shares of Viacom but he would have to relinquish control. For the strong-willed Redstone, that was an unpalatable concept.
Enter Robert F. Greenhill, former president of Morgan Stanley Group. In March, shortly before Greenhill moved to Smith Barney Shearson as chairman and chief executive, he arranged a dinner for Davis and Redstone, and quickly identified “two very simple things,” the investment banker recounted Sunday: No deal would ever happen unless Redstone emerged as the controlling shareholder and agreed to “pay the right premium” for Paramount’s shares.
There followed five months of on-again, off-again talks, which collapsed in early July, then again in late August. A chance encounter on Martha’s Vineyard between Viacom’s Biondi and Paramount legal adviser Arthur Liman put the talks on track again. Liman conferred with Redstone over dinner; a week later--on Tuesday, Sept. 7--Redstone and Davis met at the Carlyle Hotel to cement the deal, pending the outcome of their executives’ scrutiny of each others’ businesses, and board approval.
“We think we’ve created the No. 1 software company in the world,” said Redstone, praising the combination of Paramount’s movie, television and publishing units with Viacom’s fast-growing cable television networks. “I think Martin has seen this for a long time,” he added, “but I had to drag him to the altar.”
The deal won praise Sunday from one of the most significant institutional holders of stock in both companies.
“I think it’s a career capper for Sumner. Here’s a guy who inherited a bunch of drive-in theaters around Boston and now he’s chairman and has voting control of what’s arguably one of the greatest entertainment powers in the world,” said Gordon Crawford, a senior vice president of Los Angeles-based Capital Research Co., which holds about 8% of Paramount and nearly 2% of Viacom. “For Martin (Davis), it’s not a bad story either. He took over Gulf & Western when it was a far-flung company, but he’s created tremendous value for stockholders by selling non-related businesses.”
Davis refused Sunday to discuss the near-deals he was reported to have reached with Turner Broadcasting System this year, which supposedly collapsed over the issue of management.
In accepting the Viacom proposal, the Paramount chairman said he simply succumbed to his “childhood sweetheart,” alluding to his relationship with Redstone dating back nearly 40 years. When Davis was a young Paramount studio executive, he met Redstone first as a drive-in movie theater operator, then as the chairman of a Paramount shareholders committee that successfully fought off a takeover bid from an investor group led by Herbert Siegel (today, the chairman of Chris-Craft Industries).
Although the men were not social friends, their paths crossed frequently in business. Mutual acquaintances wagered that Davis would never agree to work for Redstone, but recent events proved them wrong.
“Both of them have loud barks, but at the end they want to do what’s right for the business,” observed Greenhill.
Both Davis and Redstone refuted the industry wagers that Davis will quit within a year.
“Martin will be there certainly as long as I’m there. I hope that he wants to be there,” Redstone said.
The two executives added that Paramount executives will not be cashing out on the transaction because they will roll over their stock options into the new company. Nor have any new contracts been discussed.
The two boards of the companies will be pared, with six representatives to be selected from each. The 13th director will be Redstone, who will own about 38.5% of the new company’s shares, but 69.8% of its voting stock.
At that level, Redstone’s control exceeds that of such well-known media entrepreneurs as cable television moguls Ted Turner and John Malone, or CBS Chairman Laurence Tisch. In voting control, Redstone is rivaled only by Mexico’s Emilio Azcarraga Milmo, who controls about 64.5% of Grupo Televisa, which trades on the New York Stock Exchange.
* EXECUTIVE SHAKEOUT: A look at how senior executives at Paramount and Viacom might fare. D1