Company Town : Viacom-Blockbuster Deal Near Death

Depending on whom you believe, Viacom Inc.'s planned merger with Blockbuster Entertainment is now clinically dead, or so comatose that both sides have summoned the parish priest.

People familiar with the companies say discussions have moved in recent days from what can be done to save the deal to how to best dispose of its remains. Barring some resurrection of biblical magnitude, sources expect a formal announcement of the deal's demise within a week.

That complicates life for both companies, which agreed to wed earlier this year in support of Viacom's $10-billion acquisition of Paramount Communications. Without access to Blockbuster's $550 million in annual cash flow, Viacom will have a tougher time paying down its Paramount debt. Blockbuster, meanwhile, may have to find another new technology ally.

While both companies declined comment on the reports Monday, Viacom is expected to formally announce today that it is putting Madison Square Garden and its two professional sports teams--basketball's New York Knicks and ice hockey's New York Rangers--on the auction block.

Insiders say Viacom expects to receive $1 billion or more for the Garden, the teams and the cable network that carries their games. Those same sources insist that the sale would have taken place regardless of the Blockbuster merger's status because the $30 million in annual cash flow they are said to generate is insufficient.

Allen & Co. will handle the sale for Viacom. That's an interesting turn of events because the New York investment banking firm represented rival QVC Network in the prolonged battle for Paramount. The plum assignment, however, is clearly intended to restore the relationship between the two companies. "War is over; peace is here," one Viacom insider said Monday. "There's nothing to be gained by being vengeful or retaliatory."

Sources say there are plenty of companies interested in the Garden and the teams. Among the prospective bidders are Blockbuster, Cablevision Systems Corp., a group tied to the New York Yankees' George Steinbrenner and Tele-Communications' affiliate Liberty Media Corp., which already holds stakes in a number of regional sports networks. Liberty wants the network but would seek a buyer for the Garden and the teams, a source said.

Blockbuster and Viacom have considered the possibility of swapping Madison Square Garden for some of Viacom's securities issued to Blockbuster earlier this year in a $1.85-billion transaction. But the depressed price of Viacom's shares would make it difficult for the two sides to unwind that deal--just as it has made it difficult to proceed with the merger.

The most recent sign that the proposed marriage was in trouble came last week, when Viacom and Blockbuster missed a Tuesday deadline to mail proxy materials to shareholders for a vote on May 24. The companies have until Sept. 30 to complete the merger. But knowledgeable sources expect the deal to be abandoned much sooner because the downward spiral of Viacom's stock has cooled Blockbuster shareholders to the agreement, and Viacom is unwilling to sweeten the terms.

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While Viacom A stock added 62.5 cents to close at $25.625 Monday on the American Stock Exchange, and the B stock inched up 25 cents to $22.75, its shares have fallen to new 52-week lows since the Paramount deal was closed and are hovering just above those lows now. Blockbuster shares fell 62.5 cents to $26.50 on the New York Stock Exchange, after jumping $2.50 to $27.125 last week.

Blockbuster's gains were spurred by reports in Business Week that it might have a new suitor waiting in the wings, such as Walt Disney Co. or one of the regional telephone companies. But sources on Monday said there's no hard evidence that such a deal is pending.

Entertainment analyst Jeffrey Logsdon of the Seidler Cos. in Los Angeles said Monday that acquiring Blockbuster makes sense for many companies because it's "obviously an important player in the filmed entertainment industrial complex."

Florida-based Blockbuster has recently moved into music retailing, movie production and other business areas. But Chairman H. Wayne Huizenga remains under pressure to further diversify beyond the company's core video rental business, since pay-per-vew is expected to eventually cannibalize the video rental business.

Viacom Chairman Sumner Redstone, meanwhile, is said to be considering the sale of other significant Paramount assets to pare down the nearly $8 billion in debt incurred in the acquisition. Sources say that one possibility is the sale of all or part of Paramount Publishing, which includes Simon & Schuster, although others have denied that.

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Paramount scores production deal: With several studios bidding for their services, Michael Douglas and Steven Reuther have decided to hang their shingle at Paramount Pictures. In a deal announced Monday, Douglas/Reuther Productions will deliver at least 12 movies to Paramount over the next four years. Competition for Douglas and Reuther was fierce, both for their former track records and their ability to bring independent financing to the table.

Under the terms of the Paramount deal, Douglas and Reuther will have autonomy over what films are made. Douglas is also expected to star in some of the films.

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