Viacom, MCA in Tentative TV Settlement

Viacom Inc. and MCA Inc. have reached a preliminary settlement to a legal dispute that would result in Viacom paying $1.45 billion to take full control of the USA Network cable channel that it owns in a 50-50 partnership with MCA. MCA would gain control of the Sci-Fi Channel owned by the partnership.

If the agreement is finalized later this week, Viacom will become the largest supplier of basic cable programming in the country while MCA would have a small base in cable along with enough cash to launch other channels. Both companies will be freed from restrictions in their USA Network partnership preventing them from independently starting new channels.

Before the end of the fifth day of trial in Delaware Chancery Court, the judge adjourned the case until Thursday while the parties negotiated final details on the settlement.

MCA sued Viacom in April, charging that its launch of a new cable network called TV Land, as well as its MTV and Nickelodeon networks, violated the terms of a 1981 partnership agreement governing the USA Network. The pact prevents either partner from launching new networks without triggering a buyout option in the partnership. Though Viacom contends that TV Land is a spinoff of Nickelodeon, MCA claims it qualifies as a new network, allowing the company to exercise its option to buy Viacom out of the partnership.

Television executives and analysts were somewhat surprised by the tentative settlement, first reported Monday in Daily Variety, since MCA’s original intention was to buy out Viacom’s interest to shore up its weakness in cable. While Viacom has a stable of networks, including MTV and VH-1, MCA has no interests other than its 50% stake in USA, which is second in cable prime-time ratings to Time Warner’s TNT, and its 4-year-old Sci-Fi spinoff.

“It looks like a defeat for MCA but it doesn’t have to,” said Harold Vogel, an analyst at Cowen & Co. “Both parties are now free to set up their own channels rather than waste time in court.”

Though the USA partnership is profitable, its structure had outlived its usefulness for both parties, as the companies looked to capitalize on expanding demand for channels worldwide. The partnership was set up by previous managements of companies that have since changed hands: Paramount Pictures was bought by Viacom in 1994 and MCA was purchased by Seagram Co. last year.

(Edgar Bronfman, the head of Seagram, was apparently so frustrated that the value of the partnership had not been recognized in either company’s stock price, he proposed that MCA and Viacom use the partnership as a vehicle to buy CBS. The proposal was dropped after more careful scrutiny.)

Sources say MCA reversed its position strictly because of the rich price Viacom offered, valued at roughly 20 times USA cash flow. They say Viacom could afford to pay more than MCA for USA because of its ability to wring cost savings and multiply advertising revenues by pairing it with existing networks.

According to sources close to Viacom, chairman Sumner Redstone viewed the purchase of USA as a way of becoming the largest basic cable supplier in the country, trumping Time Warner, which recently paid nearly $7 billion to buy Turner Broadcasting.

If Viacom ends up controlling USA, its cash flow from basic cable networks could be double Time Warner’s from such Turner networks as CNN, TNT, TBS and the Cartoon Network. That does not include Time Warner’s Home Box Office, which is a premium channel.

Wall Street may look askance at Redstone’s willingness to pay such a generous price at a time when Viacom’s stock price is dragging and pressure is mounting to pay down debt. But analysts on Monday seemed to see the value in Viacom adding to its strength in the fastest-growing segment of entertainment--cable programming.

“Viacom can make significant savings in cross-selling USA with its other networks,” said Christopher Dixon, an analyst at PaineWebber.

Analysts said that according to calculations supplied last year by MCA Chairman Frank Biondi--then chief executive of Viacom--USA’s cash flow of $180 million would rise immediately to $230 million as part of the Viacom family.

Some sources wondered if MCA’s willingness to give up USA in return for cash might signal that Seagram’s board might be treading cautiously in entertainment. The company was criticized by some shareholders when it bought MCA with the proceeds from the sale of DuPont stock that has since nearly doubled in value.

But MCA sources indicated the company could use the cash, combined with the proceeds from the sale of its Putnam Publishing arm and its 9% stake in Time Warner, to help finance the launch of new channels, if not buy into one of the major broadcast networks.

“They don’t have to buy content, since Universal has some of the deepest vaults in Hollywood,” said Vogel. “The only challenge is shelf space and that issue will go away in the next year as digital technology expands channel capacity” in the United States.

USA, at nearly 70 million subscribers in the United States, is far more robust than Sci-Fi, which has only 35 million. But some industry sources believe it has broader international appeal than the general interest USA brand and can be bundled with other specialty channels.

“If Viacom can form new networks around reruns of ‘I Love Lucy,’ think of what MCA can do with ‘McHale’s Navy,’ ‘The Bionic Woman’ ‘Columbo’ and ‘Alfred Hitchcock,’ ” Vogel added.

The partners have apparently figured out a way to avoid paying a huge capital gains tax that the sale of USA would trigger. Essentially, the partnership would not be dissolved but would become wholly controlled by MCA. Viacom would swap USA out of the partnership for cash, with taxes on the proceeds deferred until the partnership was dissolved.

While management issues are still being resolved, sources say Kay Koplovitz, the founder and chairman of USA Network, would move to the Viacom payroll. MCA would like to keep some other key personnel, arguing that they would be redundant within Viacom’s infrastructure, according to sources.