Viacom’s Revised Paramount Offer Pressures Diller to Rethink QVC Bid

QVC Network Inc. Chairman Barry Diller, under pressure to make a decision within days, is considering whether to significantly raise his hostile bid for Paramount Communications Inc. or scrap it altogether, sources said Monday.

People close to Diller acknowledged that he and his partners were surprised by Viacom Inc.’s revised $10-billion tender offer, which matches the bid he staged days earlier. Late Monday, some sources even hinted that Diller may end his Paramount quest in favor of a possible deal with Sony Pictures Entertainment or MCA Inc., both of which are Japanese-owned.

“We’ll do what’s right for QVC,” said one knowledgeable executive. “You don’t get crazy.”

Diller’s stalled momentum clearly raised spirits at Viacom and Paramount. At a theatrically staged New York news conference Monday, Viacom Chairman Sumner Redstone and Paramount Chairman Martin Davis acted as if their merger were already completed.

The room was trimmed with tables full of Paramount and Viacom merchandise, ranging from Star Trek figurines to Ren & Stimpy dolls to New York Knicks jackets. The party-like event began with an eight-minute video, complete with a specially penned bubble gum rock song containing the lyrics “Don’t you know the urge? Merge, merge, merge . . . Merge is the word.”

While the celebration may have been premature, analysts Monday gave Viacom the edge in the Paramount takeover battle since the boards of each company have already approved the merger and because it has already passed some key regulatory hurdles.

Redstone, who would take on substantially more debt under his revised offer, said he has access to enough cash to complete the deal, but refused to say where he would get the additional funds. He acknowledged that talks are continuing with potential partners, but also indicated that Viacom is prepared to move ahead with only bank financing if necessary.

The new agreement reduces the amount of new shares Viacom would issue by about 40%. The old deal was primarily stock. “This was an unexpected, atypical move on Sumner’s part,” one source said.

Viacom over the weekend essentially matched QVC’s two-step tender offer by proposing to buy 51% of Paramount’s outstanding shares for $4.8 billion in cash and the remaining 49% with a package of stock valued at $80 a share. The tender offer commenced Monday.

Under the terms of the original merger agreement, in which Viacom offered $7.4 billion, Paramount’s board would have been required to put the Viacom deal to a shareholder vote even if the Paramount board quit supporting the offer. But that requirement was dropped from the new merger agreement approved Sunday by both the Paramount and Viacom boards, one source said.

Paramount’s Davis was defensive at the news conference when pressed on the shareholder values of the two offers. “We’ve always acted and we always will in the best interests of our shareholders,” he said.

Redstone, who earlier indicated that he would not raise his bid, asserted that he had “not spent the last six weeks worrying about offers from QVC Network and elsewhere.” Instead, he said he discovered in further meetings with Paramount that the advantages of the combination were even greater than he had previously thought.

Redstone also continued to mock QVC as a mere shopping channel. And he contended that QVC’s offer is not entirely credible due to the lack of regulatory clearances and the allegedly inflated value of QVC’s stock.

Diller is under pressure to revise his bid or back out because his existing tender offer is set to begin by Wednesday.

Observers speculated that Diller--who is operating out of his home office in Los Angeles and who has bowed out of a scheduled news conference this week in Phoenix--will have to increase his offer by at least $10 per share in cash and stock to keep the bidding alive.

“QVC will have to respond within the next couple of days because the Viacom tender offer begins immediately,” said Jessica Reif, an analyst with Oppenheimer & Co. in New York. “Most shareholders will wait to see what QVC comes back with, but there is some pressure on them to come up with something soon.”

Diller had no comment Monday, though he and his partners--Liberty Media Corp., Comcast Corp., Cox Enterprises and the Newhouse-owned media empire Advance Publications--were said to be in strategy discussions. Those partners, including Tele-Communications Inc. Chief Executive John Malone, would be expected to participate in a bid for a different entertainment company, with Malone already linked to such discussions.

QVC decided to launch a tender offer out of frustration with Paramount, which had not yet entered serious discussions about the QVC bid even though it offered far more cash than Viacom had.

QVC has already raised $2 billion in equity from its partners and another $3 billion in bank financing. Analysts said that was still enough for QVC to raise the cash portion of its bid from the current level of about $40 per share to $50.

Paramount stock jumped $1.375 to $79 on the New York Stock Exchange. Viacom’s class A shares slipped 37.5 cents to $59 and its class B shares fell 75 cents to $52.50 on the American Stock Exchange. QVC dropped $1.125 to $53.875 on Nasdaq.

Meanwhile, the Federal Trade Commission is believed to have begun the 15-day antitrust review of QVC’s proposed merger with Paramount, mandated by the Hart-Scott-Rodino law once a tender offer is announced.

Times staff writer Kathryn Harris contributed to this report.