Blockbuster, Viacom Press Merger Talks : Entertainment: The two companies hope to reach agreement in time to top QVC’s bid for Paramount.

Viacom Inc. and Blockbuster Entertainment have entered into advanced merger discussions in hopes of topping QVC Network Inc.’s bid for Paramount Communications Inc., knowledgeable sources said Thursday.

The talks mark a dramatic escalation in the five-month takeover battle for Paramount, which reaches a crucial stage today when rival tender offers are set to expire.

Viacom and Blockbuster hope to reach a merger agreement, most likely through a stock swap, before today’s midnight deadline, the sources said. The deal would enable Viacom-Blockbuster to make an all-cash offer to Paramount shareholders, who are wary of the uncertain value of the cash-and-stock combinations now on the table.

But one knowledgeable source said that unless Viacom and Blockbuster announce a higher offer, either coupled with a definitive merger agreement or cash infusion from Blockbuster, stockholders will probably begin tendering their shares to QVC.

“They are running out of time,” the source said.

If the two companies reach a merger accord, they are expected to ask Paramount shareholders to delay tendering their shares until early next week, when they could come back with a revised bid for Paramount, the sources added. One hang-up in the talks was said to be the issue of control, since both companies are headed by strong-willed executives.

While his personal stake would be sharply reduced in the event of a merger with Blockbuster, Viacom Chairman Sumner Redstone would remain in control. But given that Redstone needs Blockbuster’s backing, the video giant’s chief executive, H. Wayne Huizenga, is said to be demanding substantive concessions.

Both Viacom and QVC have made cash tender offers for 51% of Paramount and propose using their own stock for the remaining 49%. As of Thursday, the QVC bid was valued at about $9.9 billion and Viacom’s bid was valued at about $9.3 billion. Based on those offers, Paramount’s board has recommended the QVC bid.

Any change in Viacom’s or QVC’s bid would trigger a 10-day extension. It is not clear whether QVC would respond with yet another revised bid to top a Viacom-Blockbuster offer or bow out in what nearly all observers declare has become an overheated, ego-driven bidding war.

Viacom and Blockbuster have been in negotiations all week about how the home video retail company might boost its investment so Viacom can raise its bid for Paramount. Blockbuster has already agreed to invest $600 million in Viacom as part of its battle for the entertainment company. Baby Bell Nynex Corp. has agreed to put up an additional $1.2 billion.

A Blockbuster-Viacom merger, which The Times first reported as a possibility last week, would presumably give the two companies the financial wherewithal to top any rival bid for Paramount. It would also unite two entertainment powerhouses that have substantial interests in the coming age of interactive television.

Viacom’s assets include MTV, VH-1, Showtime and substantial cable holdings.

As the nation’s dominant video rental company--its stores generate more revenue than its next 300 competitors combined--Blockbuster is one of the entertainment industry’s biggest cash generators. Earlier this year, Huizenga estimated it will generate $1 billion in cash flow through 1996 and $2 billion through 1998.

However, Blockbuster has long been criticized for being too slow to diversify from its main video rental business. Many in Hollywood believe the company must do that to avoid an inevitable day of reckoning when technological alternatives to video rentals become available.

A combination with Viacom seemingly would allow Huizenga to confront Blockbuster’s technological bogyman head-on, giving him time to make a transition and putting Blockbuster’s huge cash machine to work while video renting remains a booming business.

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Blockbuster’s cash and expanded bank credit--it recently tripled the size of its credit agreement to $1 billion--would also provide powerful ammunition in a higher bid for Paramount. In addition, the two companies combined would not be as highly leveraged as Viacom would be by itself, easing concerns of bankers.

The tense negotiations have reportedly been moving in fits and starts all week.

Sources said it is hard to envision Redstone, 70, and Huizenga, 56, working side-by-side, suggesting that a succession plan would have to be clearly spelled out.

Paramount shares added 25 cents Thursday to close at $78.50 on the New York Stock Exchange. Viacom Class A lost 87.5 cents to $47 and Viacom Class B fell 75 cents to $42.75 on the American Stock Exchange. QVC slid $1 to $39.50 and Blockbuster added 12.5 cents to $29.875 on the NYSE.

The Companies at a Glance Viacom Inc.

* 1992 financial information:

Revenue: $1.9 billion

Profit: $49 million

Earnings per share: 55 cents

* Headquarters: Dedham, Mass.

* Chairman: Sumner M. Redstone

* Employees: 5,000

* Stock: Class A: Thursday close: $47, down 87.5 cents; Class B: Thursday close: $42.75, down 75 cents

* Holdings:

Viacom Cable Television, serves 1.1 million customers

MTV Networks: MTV, MTV Europe, VH-1, Nickelodeon, Comedy Central (50% ownership), Lifetime (33%)

Showtime Networks Inc.: Showtime, The Movie Channel, FLIX, SET Pay Per View, Showtime Satellite Networks

Viacom Enterprises, syndication arm

Viacom Productions, prime-time TV arm

Viacom Entertainment: distribution rights to about 7,000 TV series episodes, 1,500 films

Viacom Broadcasting: five TV stations and 14 radio stations

Blockbuster Entertainment Corp.

*1992 financial information:

Revenue: $1.2 billion

Profit: $142 million

Earnings per share: 77 cents

* Headquarters: Ft. Lauderdale, Fla.

* Chairman: H. Wayne Huizenga

* Employees: 23,100

* Stock: Thursday close: $29.88, up 13 cents

* Holdings:

Largest video chain retailer in the U.S.

More than 30 million video rental members

About 3,170 home video stores, about one-third franchise and two-thirds company-owned, carry the Blockbuster name in 48 states and 9 countries

Owns and operates about 238 Sound Warehouse and Music Plus music stores

Spelling Entertainment Group (70.5%)

A 35% interest in Republic Pictures Corp., which merged with Spelling Entertainment Group

Agreed, late last year, to purchase Super Club Retail Entertainment Corp.’s 270 music and 160 video stores

Sources: Company reports, Times reports, Standard & Poor’s Corp., Bloomberg Business News

Researched by ADAM S. BAUMAN / Los Angeles Times