Viacom’s Sweetened Merger Plan for Paramount May Sour Diller’s Bid

Paramount Communications Inc. and Viacom Inc.--which appear to have stalled the momentum of rival bidder Barry Diller with a sweetened merger agreement--celebrated at a news conference Monday that opened to the sounds of a specially penned bubble gum rock song with the lyrics “Don’t you know the urge? Merge, merge, merge . . . Merge is the word.”

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

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

Analysts immediately gave Viacom the edge in the Paramount takeover battle since the boards of each company have already approved the merger and are committed to the transaction. At Monday’s press conference, Viacom Chairman Sumner Redstone and Paramount Chairman Martin S. Davis acted as if their merger were already completed.

Much of the press conference amounted to a glitzy sales pitch on the benefits of Viacom/Paramount. The room was trimmed with tables full of Paramount and Viacom merchandise ranging from Star Trek figurines to Ren & Stimpy dolls and New York Knicks jackets.

Redstone said he has access to enough cash to complete the revised deal, but refused to say where he would get the additional funds. He acknowledged that talks were continuing with potential partners, but also indicated that Viacom was prepared to move ahead with only bank financing, if necessary.

The new agreement, however, reduces the amount of equity Viacom will be issuing by about 40%. “This was an unexpected atypical move on Sumner’s part,” said one knowledgeable source. 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. 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 no longer recommended that 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 reacted defensively at the press conference when pressed to expound on the compared shareholder values in the two offers.

“We’ve always acted and we always will in the best interests of our shareholders,” Davis 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 was not entirely credible due to lack of regulatory clearances and the allegedly inflated value of QVC’s stock.

Analysts noted that Viacom’s new offer intensifies the time pressure on QVC.

“QVC will have to respond within the next couple of days because Viacom tender offer begins immediately,” said Jessica Reiff, 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 on 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.

QVC Network’s tender offer, although originally a higher bid, is unfriendly because Paramount’s Davis does not want to give up control of the studio and publishing company to Diller, who once ran Paramount under Davis.

QVC has already raised $2 billion in equity from its partners and another $3 billion in bank financing. Analyst 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 NYSE. Viacom’s class A shares slipped 37.5 cents to $59 its call B shares fell 75 cents to $52.50 on Amex. QVC dropped $1.125 to $53.875 on Nasdaq.

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.

Although Viacom’s review cleared a sister agency (the Justice Department’s antitrust division) in the initial time-period allocated, the FTC last month sought more information from QVC about its proposed merger with Home Shopping Network Inc.--a deal now on hold.

Times Staff Writer Kathryn Harris contributed to this report.