Viacom May Be Forced to Sell Off Assets : Mergers: It will need to trim debt from Paramount deal if Blockbuster alliance folds.

With its proposed merger with Blockbuster Entertainment Corp. on increasingly shaky ground, speculation is growing that Viacom Inc. will soon put a chunk of assets up for sale to trim the debt from its $10-billion acquisition of Paramount Communications Inc.

Meanwhile, regional telephone giant and Viacom partner Nynex Corp. on Monday denied reports that it is interested in acquiring Paramount’s sports businesses: Madison Square Garden, the New York Rangers hockey team and the New York Knicks basketball team.

Nynex said there are “no negotiations, discussions or talks with Viacom” about buying the sports operations. A spokesman added: “We plan no further investments in Viacom. This is simply incorrect information.”

Most analysts and traders give the Blockbuster-Viacom deal a less than even chance of being consummated. While Blockbuster’s top management is obligated under the merger agreement to vote its 23% stake in favor of the deal, other shareholders have criticized the terms of the merger, based on the value of Viacom’s sinking stock.

Analysts have identified about $3 billion to $4 billion in assets Viacom could shed if the Blockbuster deal fell apart, including cable operations, theme parks and its theater chain. It could also publicly spin off part or all of its Paramount Publishing unit, which includes Simon & Schuster.

A Viacom spokesman would not comment on the possibility of specific asset sales, saying the company is evaluating all options. But he downplayed any suggestions that it will be forced to sell assets. “The Viacom-Paramount transaction stands on its own, and that’s without Blockbuster,” he said.

Analysts and others add that Viacom’s debt load might not be unbearably high after the Paramount acquisition is completed. They note that Chairman Sumner Redstone took on more debt when he acquired Vicaom in the 1980s and that Time Warner Inc.’s merger-related debt levels have been considerably higher as well.

Blockbuster Chairman H. Wayne Huizenga agreed to the merger during the battle for Paramount, giving Viacom an upper hand over rival QVC Network Inc. Blockbuster’s estimated $550 million in annual cash flow had been expected to help Viacom cover its interest payments from the acquisition.

But Blockbuster shareholders are seeking sweeter terms because the deal calls for them to receive stock, which has lost value since Viacom’s acquisition of Paramount was announced in January.

But scrapping the deal would be a sticky move for Blockbuster. For one thing, the company would be dogged again by criticism that it is not diversifying fast enough from the video rental business, which many believe is threatened by technological advances that will allow home viewers to call up films electronically.

What’s more, Blockbuster has already made a huge bet on Viacom’s future, spending about $1.85 billion for its Class B stock and preferred shares to help Viacom gain control of Paramount. If Viacom’s stock price stays depressed, Blockbuster can return 13 million shares as part of an option to buy Paramount’s theme parks for $750 million.

Sources have said Viacom is unlikely to renegotiate with Blockbuster, even if it means the merger’s collapse, because a more generous deal would result in greater dilution of Viacom stock. If the deal dies, most analysts expect Viacom to enlarge the list of assets for sale mainly as a way to strengthen its balance sheet.

“They want to keep the leverage down. It makes sense to do it,” said Lisbeth R. Barron, analyst at S.G. Warburg & Co.

With or without a Blockbuster deal, Viacom appears willing to part with some Paramount assets it deems “non-strategic,” including the renovated Madison Square Garden and the sports teams. One source said Viacom has received overtures starting at $900 million for those assets.

Analysts place the value of the businesses much lower: $500 million to $700 million. Seidler Cos. managing director Jeffrey Logsdon said he values the Knicks at $150 million, the Rangers at $120 million and the Madison Square Garden operation, which includes a regional sports television channel, at about $400 million.