THE BATTLE FOR PARAMOUNT : Viacom: We Buy, or You Pick Up Tab : Redstone Says Paramount Would Owe $820 Million If Deal Crumbles

Moving to protect his merger agreement with Paramount Communications Inc. against a challenge from QVC’s Barry Diller, Viacom Inc. Chairman Sumner Redstone on Tuesday revealed that his company has the power to demand nearly $820 million in cash to abandon its agreement.

Meanwhile, sources said Viacom is continuing discussions with Chicago-based Ameritech Inc. about becoming an investor in a merged Paramount-Viacom. And rumors of other rival bids for Paramount continued, largely focusing on Turner Broadcasting and possibly Capital Cities/ABC.

On Wall Street, Paramount shares surged to a new high Tuesday, rising $7.25 a share to $77 on the New York Stock Exchange as the speculation continued.

Redstone revealed a cagey defensive strategy to the possible rivals. In an interview, he said he personally insisted on a critical “lockup” provision during negotiations over the $8.2-billion Paramount deal, which he said could derail Diller’s $9.5-billion offer.

“He’s not going to have an easy walk,” Redstone said of Diller. “We have lots of lovely options that he is going to pay for if the unacceptable happens.”

Under the terms outlined by Redstone, Viacom has the right to use a note--not cash--to buy 20% of Paramount’s shares at $69.14 each. If Viacom tendered those 24 million Paramount shares to Diller’s QVC Network Inc. under the terms of his bid, Viacom would pocket about $720 million--plus another $100 million penalty fee for the breakup of its merger deal.

Diller could not be reached for comment. Julian Brodsky, vice chairman of Comcast, one of Diller’s backers, acknowledged that he was unaware of the lockup particulars because the merger agreement documents have yet to be publicly filed. Brodsky noted, however, that the legality of those provisions could still be challenged in court.

Should Viacom prevail in its bid for Paramount, Ameritech could add a vital technology component.

Ameritech is one of two telephone companies that has talked to Viacom about investing in some or all of its cable operations, according to industry sources. Viacom has more than 1 million cable subscribers and is the 13th-largest operator in the country.

An Ameritech executive declined to comment, but a senior executive close to the talks said that “there are lots of moving parts, and things are moving fast.”

Ameritech executives have said that the Baby Bell, whose revenue last year was $11 billion, wants to join forces with cable companies and movie studios that own the entertainment and other programming that will be carried by the cable systems of the future.

One potential scenario calls for Viacom and Ameritech to fashion a deal similar to that struck earlier this year by U S West and Time Warner. U S West invested $2.5 billion for about a 25% stake of Time Warner Entertainment, and the companies agreed to jointly offer their services in the other’s monopoly franchise territory.

Southwestern Bell, which was also in talks with Viacom, said discussions broke down several weeks ago and have not resumed. According to industry sources, Viacom rejected a $2.4-billion offer from a Southwestern Bell-led partnership as too low.

On the Paramount bidding front, rumors that Capital Cities/ABC would enter the fray circulated after a stock trader was quoted as saying the media giant was preparing a cash and stock bid valued at $98 a share. The gossip was further fed by a Tuesday afternoon board meeting of Capital Cities/ABC, which had been scheduled months in advance. A spokesperson declined to comment.

Turner, meanwhile, is said to have made no progress on his efforts to launch a bid. Sources said he is still working on strategy.

Despite Wall Street’s speculation that Viacom will be forced to sweeten its offer to counter other bids, Redstone insisted he will not be stampeded into overpaying for Paramount. However, traders kept the pressure on the Viacom stock, whose Class A shares dropped $2.50 to $56.75 and Class B shares sank $2.625 to $50.875 on the American Stock Exchange. The bidding war began Monday when Diller offered to exchange 0.893 of its stock and $30 in cash for each share of Paramount, in an offer valued at $80 a share, compared to Viacom’s offer, which has a cash component of $9.10 a share.

Diller’s bid is backed by a $1-billion commitment from Comcast Corp. and fellow investment partner Liberty Media Corp., which control 47% of QVC’s shares along with Diller. However, most of the cash in the $9.5-billion QVC offer for Paramount would come from leveraging that company’s assets, since the prized entertainment company is virtually without debt.

Times staff writer John Lippman contributed to this report.

* MERGER MANIA

The tug of war for Paramount is just one sign of revived merger activity on Wall Street. A1.

Handicapping the Field

Here are the major players so far in the battle for Paramount Communications Inc Sumner Redstone:

The Viacom chairman has offered $8.2 billion for Paramount in a friendly bid. He would control roughly 70% of the combined company. Redstone, who sees a Paramount acquisition as his crowning accomplishment, is expected to aggressively counter any rival offer.

* Martin Davis:

After years of discouraging such overtures, the Paramount chairman accepted Redstone’s offer, even though it undercuts his authority. Davis continues to promote the Viacom merger, but may have a tough time defending that stance, since he’s a champion of shareholder value.

* Barry Diller:

Reluctant to mount a hostile bid last July, Diller pounced on Paramount when it went into play. The QVC chairman, who worked for Davis before a bitter falling out, has offered $9.5 billion for Paramount in a bid backed by cable powerhouses Liberty Media and Comcast.

* John Malone:

As chief executive of Tele-Communications Inc., the nation’s largest cable company, and chairman of Liberty Media, which controls part of QVC, Malone is the behind-the-scenes orchestrator of Diller’s bid. He also has influence with Ted Turner, since his company controls 24.7% of Turner Broadcasting.

* Ted Turner:

He has openly coveted Paramount as a way to expand his cable empire to include entertainment, but previously was rebuffed by Davis. After receiving board approval to make an offer for Paramount, Turner is now believed to be trying to line up the backing.