Defending the Deal : Viacom’s Redstone Resists Upping the Ante for Paramount

Sumner Redstone is usually the guy who picks the fight.

This time, the combative Viacom Inc. Chairman is on unfamiliar, defensive ground as he attempts to preserve the merger deal he struck two weeks ago to acquire Paramount Comunications Inc.

To his dismay, his old friend Barry Diller mounted a rival bid last week that threatens to turn into a rout. In an unforgettable week of Wall Street trading, the prospect of the charismatic Diller taking control at Paramount drove QVC’s stock skyward, increasing the value of its bid to $9.5 billion while Viacom’s offer trailed at $7.8 billion.

That $1.7-billion gap is bound to put pressure on the Paramount board, which is expected to meet today to ponder a response to the unsolicited offer from Diller’s home shopping QVC Network Inc. and its cable TV backers, Comcast Corp. and Liberty Media Corp.

On Sunday, QVC fired off a letter to Paramount Communications Chairman Martin S. Davis, offering to meet with Paramount’s board to clear up any questions about financing a merger. “The QVC offer is not subject to any condition with respect to financing,” the letter said.

A Paramount spokesman said Sunday that the board will consider the QVC offer, but one investment banker said he didn’t expect Paramount’s board to act immediately.

Stock speculators, meanwhile, hope the board will invite Redstone to sweeten his offer, thereby triggering another round of bids. But Wall Street could be underestimating Redstone’s stubborn resolve not to overpay for Paramount, and the ammunition Viacom has on hand.

“Short of a bullet going through me,” Redstone vowed Friday, “this merger’s going to take place.” The following day, he added cryptically: “We’re going to win. We’re going to win in a way that Wall Street doesn’t have any problem.”

Redstone’s options are limited by Viacom’s existing debt of $2.5 billion and his vow not to relinquish voting control of the combined companies. If Paramount were to acquire Viacom instead, Redstone would lose that control--and pay a staggering sum in taxes. Nevertheless, Viacom has been negotiating with regional phone companies to form a joint venture with its cable TV systems, so Wall Street holds out hope that Viacom could still come up with more cash without taking on too much debt.

The Viacom chairman--a Harvard-trained lawyer--seemed confident last week his company has constructed a legal minefield that will slow--if not destroy--QVC’s advance on the battlefield. In rapid succession, Viacom revealed an agreement that could add $820 million to QVC’s takeover costs; filed an antitrust suit against QVC and a key backer, Liberty Media; and made public the merger agreement, which suggests that the Paramount board is legally barred from considering any rival bid that is not fully financed.

Meanwhile, Wall Street is waiting to see if a rift develops between Davis and Redstone, if Viacom fails to sweeten its offer. Davis could rebel if he feels he is being “taken down a path that he can’t win,” one trader observed, which could either help QVC win or bring in an entirely new suitor.

In a joint interview Friday, however, Redstone and Davis both spoke with resolve about the merits of a Paramount-Viacom merger. Both called attention to Viacom’s superior assets, led by MTV and Nickelodeon, which have become a fast-growing franchise around the world. Redstone, in particular, urged onlookers to study the financial performance of Viacom versus QVC. Viacom reported operating cash flow of $493 million in fiscal year 1992, compared to about $173 million for QVC.

In a comparison, Wall Street analyst Lisbeth Barron projects a faster earnings growth rate for a Paramount-Viacom merger--18% annually--than a Paramount-QVC combination--15% a year--over the next three years. She estimates that Paramount-Viacom would post net income of $314 million in 1994, compared to $92 million for Paramount-QVC.

Both men said they had been “inhibited” by their desire not to attack Diller personally. For 10 years, Diller ran the Paramount studio but left in 1984, a year after Davis became chief executive of the parent company. One of Diller’s frustrations was his inability to launch a fourth network at Paramount; he subsequently achieved that at Fox, where he served as chairman until last year.

After studying his options, Diller decided to invest in the home shopping network business--bringing a Hollywood sizzle and favorable press clippings to a business that had been decidedly unglamorous. QVC shares have doubled in value this year, as Wall Street welcomed Diller and his key backer, cable television titan John Malone.

Still, Redstone and Davis appear stunned by the news media’s annointment of Diller as a high-tech guru. “I don’t care if the shopping channel is the best shopping channel in a zillion places, it is what it is,” Redstone said. “Interaction: you mean a bunch of telephones? . . . I guess that’s the interactivity. Somebody calls you up and orders some jewelry. Right? That’s great interactivity.”

“You’d better go and check Paramount and Viacom, and see where we’ve been (in technology), long before he got into QVC,” Davis added, his frustration showing.

Both men noted the high-tech, interactive businesses in which Paramount and Viacom are already engaged, ranging from Paramount’s publishing unit to Viacom’s investment in interactive games soon to hit the market under the Nickelodeon name. Redstone, 70, and Davis, 66, also tried to counter Diller’s age advantage--he’s 51--by calling attention to the 40-or-50-something executives running MTV, Nickelodeon, the Paramount movie studio and the hugely successful TV division. In addition, they noted the vigor of their No. 2 executives--Viacom Chief Executive Frank Biondi Jr., who is 48, and Paramount Chief Operating Officer Stanley Jaffe, 53.

But the interview in Redstone’s office, which required borrowing chairs to accommodate Biondi and Jaffe as well, underscored the slightly awkward logistics for the Viacom-Paramount team. Since it would be a friendly merger, Viacom cannot frontally attack Paramount’s lackluster performance in recent years.

Davis, after all, will continue as chief executive of the merged company, and he bristled at any suggestion that a Hollywood superstar executive such as Jeffrey Katzenberg might be courted to join the company. “You’re talking about changing people? You’re off (on) the wrong track,” the Paramount chairman declared.

To which Redstone added, soothingly: “We’re not suggesting . . . that other talent couldn’t be added to the team that we have.” Still, the process of negotiating--and now, defending--the planned merger appears to have allied the four executives for now. Biondi and Jaffe--who presumably are vying for the new company’s No. 3 title--burst out laughing when they simultaneously delivered the same deadpan line at one point during the interview.

And Davis, who was the unchallenged head of his company for 10 years, accepted Redstone’s blunt assessment of Paramount’s recently soaring stock, when the Viacom chairman said: “I’ve heard Paramount referred to as a sexpot. By itself, with all due regard to Martin who is sitting here, it was not a sexpot in the past. What made it a sexpot was the marriage of Paramount to Viacom.”

Davis concurred, saying, “That’s where the attraction is, really.”

If Paramount Communications Inc. Combines With:

Viacom Inc. QVC Network Inc. Estimated Calendar 1993 Combined $1.08 billion $719 million Operating Cash Flow Estimated 1994 Total Revenue $7.615 billion $6.820 billion Total Operating $1.208 billion $817 million Cash Flow Total Operating $976 million $694 million Income Net Interest $222 million $137 million Expense Net Income $314 million $92 million

Source: Lisbeth R. Barron, S.G. Warburg & Co